What is the yield to maturity

Assignment Help Corporate Finance
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.

Reference no: EM132227115

Questions Cloud

Describe the organizational relationships : Describe the organizational relationships among the IOC, the IFs, the NGBs, the NOCs, and the OCOGs, as well as their basic governance responsibilities.
Summarize the results of your research : Summarize the results of your research or provide a set of the questions you would ask SMEs if you were to meet with them.
Discuss the factors involved in community of interests : Discuss the factors involved in community of interests and its relation to certification of a bargaining unit.
Describe the event planning team : Explain the purpose and philosophy of the event (not-for-profit or for-profit). Provide an agenda or schedule of the event activities.
What is the yield to maturity : What is the bonds price - Do not round intermediate calculations. Round your answer to the nearest cent - What is the yield to maturity
What actors are currently involved with the issue : Through this assignment, we will combine your learning from the Current Event Analysis and Policy Case Study. I want you to identify a different problem.
Loaded on single line of gravity fed flow racks : There are several sections of a unit load warehouse in which pallets are loaded on a single line of gravity fed flow racks.
Discussion about the economic policy : Economic policy is a complex but vital part of the United States. To start this forum, take a look at CNBCs explanation of who the Federal Reserve is.
Preparing to operate its new food kitchen for thanksgiving : Draw a process map that reflects the actual setup (e.g. configuration) of the food kitchen’s Thanksgiving operations and include expected process and wait times

Reviews

Write a Review

Corporate Finance Questions & Answers

  Impact of the global economic crisis on business environment

This paper reviews the article of ‘the impact of the global economic crisis on the business environment' that is written by Roman & Sargu (2011).

  Explain the short and the long-run effects on real output

Explain the short and the long-run effects on real output, price, and unemployment

  Examine the requirements for measuring assets

Examine the needs for measuring assets at fair value in accounting standards

  Financial analysis report driven by rigorous ratio analysis

Financial analysis report driven by rigorous ratio analysis

  Calculate the value of the merged company

Calculate the value of the merged company, the gains (losses) to each group of shareholders, NPV of the deal under different payment methods. Synergy remains the same regardless of payment method.

  Stock market project

Select five companies for the purpose of tracking the stock market, preparing research on the companies, and preparing company reports.

  Write paper on financial analysis and business analysis

Write paper on financial analysis and business analysis

  Intermediate finance

Presence of the taxes increase or decrease the value of the firm

  Average price-earnings ratio

What is the value per share of the company's stock

  Determine the financial consequences

Show by calculation the net present value for the three alternatives (no education, network design certification, mba). Also, according to NPV suggest which alternative you advise your friend to choose

  Prepare a spread sheet model

Prepare a spread sheet model for the client that determines NPV/IRR with and without tax.

  Principles and tools for financial decision-making

Principles and tools for financial decision-making. Analyse the concept of corporate capital structure and compute cost of capital.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd