Company M\'s bonds currently sell for $1,200. They pay a $50 annual coupon, have
ID: 2817741 • Letter: C
Question
Company M's bonds currently sell for $1,200. They pay a $50 annual coupon, have a 20-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,090. Assume that no costs other than the call premium would be Incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's yield to maturity and yield to call? (Subtract the yield to maturity from yield to call; it is possible to get a negative answer) Select one: O O O O a. 1.45% b. 1.02% c. 1.16% d. 1.35%Explanation / Answer
Hello Sir/ Mam
YOUR REQUIRED ANSWER IS OPTION C : 1.16%
Current Price of the bond = $1,200
Annual Coupon = $50
Time to Maturity = 20 years
Face Value = $1,000
Hence, to calculate YTM, we can use the excel formula, "=RATE(20,50,-1200,1000,0)" , we found out that the YTM = 3.5823%
Now,
Current Price of the bond = $1,200
Annual Coupon = $50
Time to Maturity = 5 years
Maturity Value = $1,090
Hence, to calculate YTC, we can use the excel formula, "=RATE(5,50,-1200,1090,0)" , we found out that the YTM = 2.4199%
Hence, the difference between YTM and YTC = 3.5823% - 2.4199% = 1.1623%
I hope this solves your doubt.
Feel free to comment if you still have any query.
Do give a thumbs up if you find this helpful.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.