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ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-Through Problem 7-13 Price and yield An 9% semiannual coupon bond matures in 4 years. The bond has a face value of $1,000 and a current yield of 8.9881%. What is the bond's price? Round your answer to the nearest cent. $ What is the bond's YTM? % II. Problem 7-18 Yield to maturity and yield to call Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 12% annual coupon payment, and their current price is $1,170. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). a. What is the yield to maturity? Round your answer to two decimal places. % b. What is the yield to call if they are called in 5 years? Round your answer to two decimal places. % c. Which yield might investors expect to cam on these bonds? Why? I. Investors would expect the bonds to be called and to cam the YTC because the YTC is less than the YTM. II. Investors would expect the bonds to be called and to cam the YTC because the YTM is less than the YTC. III. Investors would expect the bonds to be called and to cam the YTC because the YTC is greater than the YTM. IV. Investors would not expect the bonds to be called and to cam the YTM because the YTM is greater than the YTC. V. Investors would not expect the bonds to be called and to cam the YTM because the YTM is less than the YTC.

Explanation / Answer

Solution 7-13:

Given that I = 0.09/2*1000 = 45, FV = 1000, n = 4*2 = 8

Current yield = I/Price of bond

0.089881 = 90/Price of bond

Price of bond = 90/0.089881

Price of bond = $1000.21

Using YTM approximation,

YTM = [I + (F – P)/n]/ (F + P)/2

YTM = [45 + (1000 – 1000.21)/8]/ (1000 + 1000.21)/2

YTM = 44.97375/1000.105

YTM = 4.50% (Semi-annually)

YTM = 9% (annually)

Solution 7-18:

a. Given that I = 0.12*1000 = 120, FV = 1000, n = 10, P = 1,170

Using YTM approximation,

YTM = [I + (F – P)/n]/ (F + P)/2

YTM = [120 + (1000 – 1170)/10]/ (1000 + 1170)/2

YTM = 103/1085

YTM = 9.31

b. Given that I = 0.12*1000 = 120, FV = 1090, n = 5, P = 1,170

Using YTM approximation,

YTM = [I + (F – P)/n]/ (F + P)/2

YTM = [120 + (1090 – 1170)/5]/ (1090 + 1170)/2

YTM = 104/1130

YTM = 9.12%

c.

Investors would expect the bonds to be called and earn the YTC because YTC is less than the YTM.

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