Reference no: EM132227115
YIELD TO MATURITY
A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 5 years at $1,177, and currently sell at a price of $1,318.41.
a. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
b. What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.
c. What return should investors expect to earn on these bonds?
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.
V. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
YIELD TO CALL
Six years ago the Templeton Company issued 26-year bonds with an 14% annual coupon rate at their $1,000 par value. The bonds had an 9% call premium, with 5 years of call protection. Today Templeton called the bonds.
a. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places.
b. Why the investor should or should not be happy that Templeton called them.
I. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates.
II. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.
III. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.
IV. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.
V. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.
CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY
Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $901.40. The capital gains yield last year was -9.86%.
a. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
b. For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.
For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.
c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?
I. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM.
II. As long as promised coupon payments are made, the current yield will not change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.
III. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.
IV. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will not cause the price to change and as a result, the realized return to investors should equal the YTM.
V. As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.
PRICE AND YIELD
An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.3631.
What is the bond's price? Do not round intermediate calculations. Round your answer to the nearest cent.
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.