Yield to call Nine years ago the Singleton Company issued 27-year bonds with a 1
ID: 2729955 • Letter: Y
Question
Yield to call Nine years ago the Singleton Company issued 27-year bonds with a 12% annual coupon rate at their S1,000 par value. The bonds had a 8% call premium, with 5 years of call protection. Today Singleton tailed the bonds. a. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. b. Explain why the investor should or should not be happy that Singleton called them. I. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates. II. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates. III. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. IV. Since the Kinds have been called, investors will no longer need to consider reinvestment rate risk. V. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates. Problem 7-10 Current yield, capital gains yield, and yield to maturity Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued I year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $908,30. The capital gains yield last year was - 9.17%. a. What is the yield to maturity? Round your answer to two decimal places. b. For the coming year, what is the expected current yield? Round your answer to two decimal places.Explanation / Answer
7-8)
b)
Correct option is (IV)
Because there will be no risk of reinvestment of coupons. All funds will be received on the date of call itself. Even, YTC i greater than YTM.
Call price (Here it is FV) $ 1,080.00 Coupon rate 12.00% Number of compounding periods per year 1 Interest per period (PMT) $ 120.00 Bond price (PV) $ -1,000.00 Number of years to call 5 Number of compounding periods till call (NPER) 5 Bond Yield to call/Realized return RATE(NPER,PMT,PV,FV) Bond Yield to call/Realized return 13.23%Related Questions
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