Problem 7-12 Yield to call It is now January 1, 2011, and you are considering th
ID: 2614192 • Letter: P
Question
Problem 7-12
Yield to call
It is now January 1, 2011, and you are considering the purchase of an outstanding bond that was issued on January 1, 2009. It has a 8.5% annual coupon and had a 30-year original maturity. (It matures on December 31, 2038.) There is 5 years of call protection (until December 31, 2013), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 116.575% of par, or $1,165.75.
a.What is the yield to maturity? Round your answer to two decimal places.
%
b.What is the yield to call? Round your answer to two decimal places.
%
-Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
-Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
-Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
-Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
-Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
-Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
-Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
-Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
-Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
-Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
Problem 7-12
Yield to call
It is now January 1, 2011, and you are considering the purchase of an outstanding bond that was issued on January 1, 2009. It has a 8.5% annual coupon and had a 30-year original maturity. (It matures on December 31, 2038.) There is 5 years of call protection (until December 31, 2013), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 116.575% of par, or $1,165.75.
a.What is the yield to maturity? Round your answer to two decimal places.
%
b.What is the yield to call? Round your answer to two decimal places.
%
-Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
-Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
-Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
-Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
-Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
d.Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely? (select multiple choice answer)
-Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
-Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
-Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
-Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
-Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
Explanation / Answer
a Yield to maturity FV 1000 PV 1165.75 PMT 85 (1000 x 8.5%) NPER 28 YTM 7.12% =RATE(28,85,-1165.75,1000) b Yield to call FV 1090 Call price PV 1165.75 PMT 85 (1000 x 8.5%) NPER 3 YTM 5.23% =RATE(3,85,-1165.75,1090) c D Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. d A Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.