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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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BOND YIELDS Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it sells for $1,200.

  1. a. What are the bond’s nominal yield to maturity and its nominal yield to call? Would an investor be more likely to earn the YTM or the YTC?
  2. b. What is the current yield? Is this yield affected by whether the bond is likely to be called? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.)
  3. c. What is the expected capital gains (or loss) yield for the coming year? Is this yield dependent on whether the bond is expected to be called? Explain your answer.
  4. d.
  5. e.

a.

Summary Introduction

To determine: Yield to Maturity (YTM), Yield to Call (YTC) and whether the YTM or YTC is more for the investors.

Yield to Maturity (YTM):

It is the rate of interest earned till the maturity of the bond by the bondholder.

Yield to Call:

It is the rate of interest earned until the bonds are being called, but before maturity of the bond.

Explanation

Given,

Semiannual coupon rate is 13% (6.5% annually).

Selling price (value of bond) is $1,200.

Par value of bond is $1,000.

Maturity is after 10 years.

Yield to maturity (YTM) can be calculated through value of bond.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)t+Parvalue(1+

b.

Summary Introduction

To determine: Current yield, and effect on current yield of bond to be called.

Current Yield:

Current yield is the rate of return earned by the bondholders currently.

c.

Summary Introduction

To determine: Expected capital gain or loss yield for coming year and whether it will get affected from the expected calling of the bonds.

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