2. A firm's bonds have a maturity of 10 years with a $1,000 facevalue, have a 6% semiannual coupon, and currently sell at aprice of $1,100. If the bonds are callable in 5 years at $1,030,what are their nominal YTC?

Introduction: Yield to call (YTC) is a financial term that refers to the yield a bondholder would…

Answered: 2. A firm's bonds have a maturity of 10…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 8P

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Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). What is the yield to maturity? What is the yield to call if they are called in 5 years? Which yield might investors expect to earn on these bonds, and why? The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?

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2. A firm's bonds have a maturity of 10 years with a $1,000 face value, have a 6% semiannual coupon, and currently sell at a price of $1,100. If the bonds are callable in 5 years at $1,030, what are their nominal YTC?