On April 1, 2014, you consider the purchase of an outstanding bond that was issu

Question

On April 1, 2014, you consider the purchase of an outstanding bond that was issued on April 1, 2013. It has a 8% annual coupon and has a 30 year orginal maturity. Thus, it matures at the end of March 2043. There are five years of call protection, which is until the end of March 2018, at which time it can be called in with an 8% call premium. Interest rates have declined since it was issued, and it is now selling for 115.875% of its par value of $1,000. What is the YTM? and What is the YTC? Please show work

If you decide to purchase the bond at the beginning of this month, April 1, 2014, which return would you expect to earn if the interest rates remain less than 8%, the YTM or YTC?

Explanation / Answer

Yield to maturity Face value = 1000 Market price = 1158.75 Coupon payment = 80 Call price = 1080 No. of years to call = 4 years Yield to maturity = Coupon payment + (Face Value - Price of the bond)/Years to maturity ------------------------------------------------------------------------------------- (Face Value + Price of the bond) / 2 = 80 + (1000-1158.75)/29 ------------------------------------ (1000+1158.75)/2 =          74.53 -----------    1,079.38 Yield to Maturity = 6.90% Yield to Call Yield to Call = Annual Interest + Call Price - Market Price ------------------------------ No. of years to call ----------------------------------------------------------- (Call Price + Market Price) / 2 = 80 + (1080-1158.75) / 4 ------------------------------------ (1080+1158.75)/2 =          60.31 ----------- 1119.36 Yield to Call = 5.39%

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