Question 10 (of 10) 0. value: 10.00 points A bond that settles on June 7, 2013,
ID: 2792499 • Letter: Q
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Question 10 (of 10) 0. value: 10.00 points A bond that settles on June 7, 2013, matures on July 1, 2033, and may be called at any time after July 1, 2023, at a price of 156. The coupon rate on the bond is 7.2 percent and the price is 169.00. What is the yield to maturity and yield to call on this bond? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the"%" sign in your response.) Yield to maturity Yield to call 2.79 % References Worksheet Dificulty 3 Hard 27Explanation / Answer
The coupon rate on the bond is 7.2% and price is 169,therefore, we can say that present value of future bond cash flows is equal to 169
Considering the coupon is paid every year and face value of the bond is 100, annual coupon payment comes out to 7.2
On maturity i.e. July 2033, bond will pay both coupon payment and face value of the bond i.e.100
Therefore, one can say that ,
PMT=7.2, time = 20 years, PV= 169, FV=100, CPT I/Y? this gives us I/Y of 2.7% using financial calculator
similarlyfor call to yield, we are given that bond can be called at a price of 156 anytime post 2023 therefore, we have
PMT=7.2, time to maturity post 2023=10 years, PV=156, FV=100, CPT I/Y? this gives us I/Y of 1.218% considering the call option is exercised at 2023 when there are 10 years left to maturity, however, if the call option is exercised further close to maturity and issuer still manage to get price of 156 on bond , then obivously the yield to call will increase further and will be highest near maturity since it is written that bond can be called anytime after 2023 and at the same price of 156 which normally does not happen as the intrinsic call value on the bond closer to maturity becomes nearly zero
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