Click here to read the eBook: Bond Yields Problem Walk-Through BOND YIELDS Last

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Click here to read the eBook: Bond Yields Problem Walk-Through BOND YIELDS Last year Carson Industries issued a 10-year, 14% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,060 and it sells for $1,300. What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. % Would an investor be more likely to earn the YTM or the YTC? What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. % Is this yield affected by whether the bond is likely to be called? If the bond is called, the current yield and the capital gains yield will remain the same. If the bond is called, the capital gains yield will remain the same but the current yield will be different. If the bond is called, the current yield and the capital gains yield will both be different. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different. If the bond is called, the current yield will remain the same but the capital gains yield will be different. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign. % Is this yield dependent on whether the bond is expected to be called?

Explanation / Answer

1-

Yield to maturity semiannual

Using rate function in MS excel

rate(nper,pmt,pv,fv,type)

nper = 10*2 =20 pmt = 1000*14%/2 = 70 pv =-1300 fv =1000 type =0

Yield to maturity (annual)

4.66*2

9.32

2-

Yield to call semiannual

Using rate function in MS excel

rate(nper,pmt,pv,fv,type)

nper = 6*2 =12 pmt = 1000*14%/2 = 70 pv =-1060 fv =1060 type =0

Annual Yield to maturity

6.27*2

12.54

3-

Investor would like to earn YTC as it is more than the YTM

4-

current Yield semiannual

Interest/current market price

70/1300

5.38%

Current Yield annual

5.38*2

10.76

5-

If the bond is called, the current yield will remain the same but the capital gains yield will be different

6-

value of bond after year 1

Using pv function in MS excel

pv(rate,nper,pmt,fv,type)

($1,280.95)

capital gain yield

(current value-purchase price)/purchase price

(1280.95-1300)/1300

-1.47%

No it is not dependent on bonds to be called

1-

Yield to maturity semiannual

Using rate function in MS excel

rate(nper,pmt,pv,fv,type)

nper = 10*2 =20 pmt = 1000*14%/2 = 70 pv =-1300 fv =1000 type =0

Yield to maturity (annual)

4.66*2

9.32

2-

Yield to call semiannual

Using rate function in MS excel

rate(nper,pmt,pv,fv,type)

nper = 6*2 =12 pmt = 1000*14%/2 = 70 pv =-1060 fv =1060 type =0

Annual Yield to maturity

6.27*2

12.54

3-

Investor would like to earn YTC as it is more than the YTM

4-

current Yield semiannual

Interest/current market price

70/1300

5.38%

Current Yield annual

5.38*2

10.76

5-

If the bond is called, the current yield will remain the same but the capital gains yield will be different

6-

value of bond after year 1

Using pv function in MS excel

pv(rate,nper,pmt,fv,type)

($1,280.95)

capital gain yield

(current value-purchase price)/purchase price

(1280.95-1300)/1300

-1.47%

No it is not dependent on bonds to be called

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