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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

YIELD TO CALL Six years ago the Singleton Company issued 20-year bonds with a 14% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Singleton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Explain why the investor should or should not be happy that Singleton called them.

Summary Introduction

To identify: Yield to call (YTC).

Yield to Call: It refers to the rate of interest earned till the bonds are being called, but before maturity of the bond.

Explanation

Given,

Coupon rate is 14%.

Par value of bond is $1,000.

Maturity is after 14 years.

Call premium 9%.

Call price is $1,090 (working note).

Yield to call (YTC) can be calculated through value of bond.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)t+Callprice(1+rd)N

Where,

INT= Interest rate

N= Number of year for maturity.

Rd= Rate of discount.

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