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- Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?Start with the partial model in the file Ch20 P08 Build a Model.xlsx on the textbooks Web site. Maggies Magazines (MM) has straight nonconvertible bonds that currently yield 9%. MMs stock sells for 22 per share, has an expected constant growth rate of 6%, and has a dividend yield of 4%. MM plans on issuing convertible bonds that will have a 1,000 par value, a coupon rate of 8%, a 20-year maturity, and a conversion ratio of 32 (i.e., each bond could be convertible into 32 shares of stock). Coupon payments will be made annually. The bonds will be noncallable for 5 years, after which they will be callable at a price of 1,090; this call price would decline by 6 per year in Year 6 and each year thereafter. For simplicity, assume that the bonds may be called or converted only at the end of a year, immediately after the coupon and dividend payments. Management will call the bonds when their conversion value exceeds 25% of their par value (not their call price). a. For each year, calculate (1) the anticipated stock price, (2) the anticipated conversion value, (3) the anticipated straight-bond price, and (4) the cash flow to the investor assuming conversion occurs. At what year do you expect the bonds will be forced into conversion with a call? What is the bonds value in conversion when it is converted at this time? What is the cash flow to the bondholder when it is converted at this time? (Hint: The cash flow includes the conversion value and the coupon payment, because the conversion occurs immediately after the coupon is paid.) b. What is the expected rate of return (i.e., the before-tax component cost) on the proposed convertible issue? c. Assume that the convertible bondholders require a 9% rate of return. If the coupon rate remains unchanged, then what conversion ratio will give a bond price of 1,000?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?
- Bond Yields and Rates of Return A 10-year, 12% semiannual coupon bond with a par value of 1,000 may be called in 4 years at a call price of 1,060. The bond sells for 1,100. (Assume that the bond has just been issued.) a. What is the bonds yield to maturity? b. What is the bonds current yield? c. What is the bonds capital gain or loss yield? d. What is the bonds yield to call?Calculate the current market price of a 15%, $1,000 semi-annual coupon bond with 20 years to maturity and a YTM of 9.631%?Select one: A. $1,365.51 B. $1,472.51 C. $1,625.35 D. $1,563.772. Consider an 8% annual coupon bond trading to yield 6% with 3 years to maturity and a par value of $1000. a. What is the Duration? b. What is Modified Duration? c. What is expected Price change of Bond for a 5 basis point (.05%, .0005) increase in YTM using modified duration?
