Arnot International\'s bonds have a current market price of $1,250. The bonds ha

Question

Arnot International's bonds have a current market price of $1,250. The bonds have an 12% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (Call price = $1,090).

What is the yield to maturity? Round your answer to two decimal places.
  %

What is the yield to call, if they are called in 5 years? Round your answer to two decimal places.
  %

Which yield might investors expect to earn on these bonds, and why?
-Select-IIIIIIIVItem 3  
I. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
II. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
III. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
IV. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.

The bond's indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?
-Select- in Year 6in Year 7in Year 8in Year 9Bonds are always calledItem 4

Explanation / Answer

What is the yield to maturity? Round your answer to two decimal places.    % Ans) Current Market Price = $        1,250 Coupon payment = 12% Face Value = $        1,000 Maturity Value = 1000 Yield to Maturity = [Coupon Payment + (Redemption Price - Purchases Price)/ Period to Maturity ]/ [(Redemption Price + Purchases Price )]/2 = ([120+(1000-1250)/10 [(1000+1250)]/2 = (120-25) 1125 = (95)/1125 = 8.44% What is the yield to call, if they are called in 5 years? Round your answer to two decimal places.    % Ans) Current Market Price = $        1,250 Coupon payment = 12% Face Value = $        1,000 Can Call with in 5 years at a price of = 109% $        1,090 Yield to Call = [Coupon Payment + (Redemption Price - Purchases Price)/ Period to Maturity ]/ [(Redemption Price + Purchases Price )]/2 = [(120+ (1090-1250)/5]/ [(1090+1250)]/2 = [120-32]/1170 = 88/1170 = 7.52% Which yield might investors expect to earn on these bonds, and why? Ans) I. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

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