1. Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 yea
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Question
1. Kempton 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 $1,175. 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.
2. An 8% semiannual coupon bond matures in 4 years. The bond has a face value of $1,000 and a current yield of 8.1957%.
a. What is the bond's YTM? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answers to two decimal places.
Explanation / Answer
Answer 1-a.
Face Value = $1,000
Current Price = $1,175
Annual Coupon Rate = 12%
Annual Coupon = 12% * $1,000
Annual Coupon = $120
Time to Maturity = 10 years
Let Annual YTM be i%
$1,175 = $120 * PVIFA(i%, 10) + $1,000 * PVIF(i%, 10)
Using financial calculator:
N = 10
PV = -1175
PMT = 120
FV = 1000
I = 9.24%
Annual YTM = 9.24%
Answer 1-b.
Call Price = $1,090
Current Price = $1,175
Annual Coupon = $120
Time to Call = 5 years
Let Annual YTC be i%
$1,175 = $120 * PVIFA(i%, 5) + $1,090 * PVIF(i%, 5)
Using financial calculator:
N = 5
PV = -1175
PMT = 120
FV = 1090
I = 9.00%
Annual YTC = 9.00%
Answer 2.
Face Value = $1,000
Annual Coupon Rate = 8%
Semiannual Coupon Rate = 4%
Semiannual Coupon = 4% * $1,000
Semiannual Coupon = $40
Current Yield = Annual Coupon / Current Price
0.081957 = $80 / Current Price
Current Price = $976.1216
Time to Maturity = 4 years
Semiannual Period to Maturity = 8
Let Semiannual YTM be i%
$976.1216 = $40 * PVIFA(i%, 8) + $1,000 * PVIF(i%, 8)
Using financial calculator:
N = 8
PV = -976.1216
PMT = 40
FV = 1000
I = 4.36%
Semiannual YTM = 4.36%
Annual YTM = 2 *4.36%
Annual YTM = 8.72%
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