Click here to read the eBook: Bond Yields YIELD TO CALL It ts now lanuary 1, 201

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Click here to read the eBook: Bond Yields YIELD TO CALL It ts now lanuary 1, 2016, and you are conso en g the purchase of an outstanding bond that was issued on January 1, 2014. It has a 8.5% annual coupon and had a 30. year original maturity. (It matures on December 31, 2043.) There is 5 years of call protection (until December 31, 2018), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined s nce it was issued, and it is now selling at 119.575% of par, or $1,195.75. a. What is the yield to maturity? Round your answer to two decimal places. What is the yield to call? Round your answer to two decimal places b. If you bought this bond, which return would you actually earn? Select the correct option. I. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM II. Investors would not expect the bonds to be called and to eam the YTM because the YTM is greater than the YTC III. Investors would not expect the bonds to be called and to ean the YTM because the YTM is less than the YTC 1. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. V. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC Select v C. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely? 1. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC II. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. III. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC V. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM. V. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM

Explanation / Answer

a Yield to maturity FV 1000 PV 1195.75 PMT 85 (1000 x 8.5%) NPER 28 YTM 6.90% =RATE(28,85,-1195.75,1000) Yield to call FV 1090 Call price PV 1195.75 PMT 85 (1000 x 8.5%) NPER 3 YTM 4.28% =RATE(3,85,-1195.75,1090) b IV Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. c II Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

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