Fundamentals of Financial Manageme...
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Fundamentals of Financial Manageme...
BOND YIELDS Last year Clark Company issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for $1,100.
- a. What arc 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?
- 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.)
- 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.
a.
To identify: Yield to maturity (YTM), yield to call (YTC) and whether the YTM or YTC is more for the investors.
Yield to Maturity (YTM): It refers to the rate of interest earned till the maturity of the bond by the bond holder.
Yield to Call: It refers to the rate of interest earned till the bonds are being called, but before maturity of the bond.
Given,
Semiannual coupon rate is 12%.
Selling price (value of bond) is $1,100.
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,
b.
Current Yield: Current yield is the rate of return earned by the bond holders currently.
To identify: Current yield.
c.
To identify: Expected capital gain or loss yield for current year and whether it affect the expected calling of the bonds.
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