Hooper Printing Inc. has bonds outstanding with 13 years left to maturity. You a

Question

Hooper Printing Inc. has bonds outstanding with 13 years left to maturity. You are entitled to 15 more interest payments, and the bonds have an 8% annual coupon. Par value at issue is $1000. However, due to changes in interest rates, the bond's market price has risen to $991.50 since last year. The capital gains yield last year was +6.25%. How much is the yield to maturity for this bond? For the current year, how much is the current yield? For the current year, how much is the capital gains yield? d; If the bond was callable in year 18 (5 years from now) at a 10% premium, how much is the yield to call if you bought today?

Explanation / Answer

Answer: We take:

n (years to maturity)= 13 years

P (price) = $991.50

F (Face value) = $1000

C(Coupon/ Interest payment) = $80

Answer a) : YTM = {C+((F-P)/n)}/((F+P)/2)

=(80+((1000-991)/13))/((1000+991)/2) = 8.11%

b) Current Yield = Annual coupon/current price

=80/991.50

=8.07%

c) Capital gain Yield = (p1-p0)/p0

=(991.5-1000)/1000 = -.86%

here p1 is equal to current market price

and, P0 is face value

d) Yield to call will be calcuted with this formula

B0 = c/2{(1-(1+ytc/2)^2d))/(ytc/2)}+(cp/(1+(ytc/2))^2d)

= 80/2{(1-(1+YTC/2)^2*5))/(YTC/2)}+(1100/(1+(YTC/2))^2*5) = 9.82%

Where,

B0 = the bond price

C = the annual coupon payment

CP = the call price

YTC = the yield to call on the bond

CD = the number of years remaining until the call date

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