Kaufman Enterprises has bonds outstanding with a $1,000 facevalue and 10 years l

Question

Kaufman Enterprises has bonds outstanding with a $1,000 facevalue and 10 years left until maturity. They have an 11percent annual coupon payment and their current price is$1,175. The bonds may be called in 5 years at 109 percent offace value (Call price = $1090) What is the yield to maturity? What is the yield to call, if they are called in 5years. Which yield might investors expect to earn on these bonds, andwhy? Kaufman Enterprises has bonds outstanding with a $1,000 facevalue and 10 years left until maturity. They have an 11percent annual coupon payment and their current price is$1,175. The bonds may be called in 5 years at 109 percent offace value (Call price = $1090) What is the yield to maturity? What is the yield to call, if they are called in 5years. Which yield might investors expect to earn on these bonds, andwhy?

Explanation / Answer

10 years

Par Value of theBond $1,000 Number of Years toMaturity

10 years

Annual Coupon Rate 11% Current Price of theBond $1,175 Call Price of the Bond $1,090 CalculatingYTM: (Using Ms-Excel "RATE"Function): Number of Periods 10 Annual Coupon Payment [$1,000 *11%] -$110 Present Value of theBond $1,175 Future Value (or) Par Value of theBond -$1,000 Rate of Return on the Bond(RATE) 8.35% Calculating YTC (Yield ToCall) (Using Ms-Excel "RATE"Function): Number of Periods 5 Annual Coupon Payment [$1,000 *11%] -$110 Present Value of theBond $1,175 Future Value (or) Par Value of theBond -$1,090 Rate of Return on the Bond(RATE) 8.13% Yield to Maturity on theBond (YTM) 8.35% Yield to Call on theBond       (YTC) 8.13% if the Bond is a PremiumBond YTM > YTC if the Bond is a DiscountBond YTM < YTC Note: Here, the Bond isa Premium Bond. Thus, the Yield to Maturity (YTM) is greater thanthe Yield to Call (YTC).

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