Company Coupon Maturity Last Price Yield International Paper (IP) 6.750 Sep 01,
ID: 2770473 • Letter: C
Question
Company Coupon Maturity Last Price Yield
International Paper (IP) 6.750 Sep 01, 2011 108.198 5.468
Sara Lee (SLE) 3.875 Jun 15, 2013 89.700 5.235
Wells Fargo (WFC) 7.250 Aug 24, 2005 109.645 2.191
General Motors (GM) 7.125 Jul 15, 2013 101.201 6.952
Lincoln National (LNC) 6.200 Dec 15, 2011 105.903 5.307
a. Explain why the International Paper bond isselling at a premium but the Sara Lee is selling at a discount.
b. Why is the yield (yield to maturity) on theGeneral Motors bond so much higher than the yield on the Sara Leebond?
c. Why is the yield (yield to maturity) on theWells Fargo Bank bond so much less than the yield on the LincolnNational Corp. bond?
Explanation / Answer
a. Explain why theinternational Paper Bond is selling at a premium but the Sara Leeis selling at a discount.
This is because the International Paper Bond is offering ahigher Coupon Rate than Sara Lee’s.
b. Why is the yield (yield tomaturity) on the General Motors bond so much higher than the yieldon the Sara Lee bond?
GM bond has a higher YTM than SLEsince the coupon payments of GM are much higherthan SLE’s. The YTMcould also be higher because GM bonds have a higher credit riskthan SLE’s.
c. Why is the yield (yield tomaturity) on the Wells Fargo Bank bond so much less than yield onthe Lincoln National Corp. bond?
This is because WellsFargo’s bond has a higher price thanLincoln National Corp.; this is in addition to the factthat Lincoln’s has a longertime to maturity.
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