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a.
To calculate: The Selling price of the bond.
Introduction:
b.
To calculate: The yield to maturity on the bond
Introduction:
Yield to maturity: In short it is represented as YTM. YTM is supposed to be the total return which is expected from a bond when the bond is held till the maturity date.
c.
To calculate: The market expectations of selling price if the expectation theory yield curve is correct, on which the bond will be sold next year.
Introduction:
Expectations theory: Expectation theory deals with prediction of the value of short-term interest rates in future will the help of long-term interest rates prevailing on current date.
d.
To calculate: The market expectations of selling price of the bond during next year using liquidity preference theory and assuming liquidity premium 1%.
Introduction:
Expectations theory: Expectation theory deals with prediction of the value of short-term interest rates in future will the help of long-term interest rates prevailing on current date.
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Chapter 15 Solutions
EBK INVESTMENTS
- 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?arrow_forwardYield 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?arrow_forwardSuppose 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?arrow_forward
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