Keenan Industries has a bond outstanding with 17 years to maturity, a 9.0% nomin
ID: 2632275 • Letter: K
Question
Keenan Industries has a bond outstanding with 17 years to maturity, a 9.0% nominal coupon rate, semiannual payments, and a $1,000 par value. The bond has a 7.80% nominal yield to maturity, but it can be called in 5 years at a price of $1,090. What is the bond
Keenan Industries has a bond outstanding with 17 years to maturity, a 9.0% nominal coupon rate, semiannual payments, and a $1,000 par value. The bond has a 7.80% nominal yield to maturity, but it can be called in 5 years at a price of $1,090. What is the bond
Explanation / Answer
Hi
Please find the detailed answer as follows:
Calculate Present Value of the Bond
Nper = 17*2 = 34 (indicates the period)
Rate = 7.80*1/2 = 3.90% (indicates the semi-annual interest rate)
FV = 1000 (indicates the face value of bonds)
PMT = 1000*1/2*9% = 45 (indicates semi-annual interest payment)
PV = ? (indicates the present value of bonds)
Present Value = PV(Rate,Nper,PMT,FV) = PV(3.90%,34,45,1000) = $1111.95
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Calculate Yield to Call with the Above Value
Nper = 5*2 = 10 (indicates the period)
Rate = ? (indicates yield)
FV = 1090 (indicates the yield to call value)
PMT = 1000*1/2*9% = 45 (indicates semi-annual interest payment)
PV = 1111.95 (indicates the present value of bonds)
Yield to Call = Rate(Nper,PMT,PV,FV)*2 = Rate(10,45,-1111.95,1090)*2 = 7.76%
Answer is 7.76%.
Thanks.
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