McCue Inc.\'s bonds currently sell for $1,100. They pay a $90 annual coupon, hav
ID: 2645214 • Letter: M
Question
McCue Inc.'s bonds currently sell for $1,100. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)
0.64%
0.73%
0.60%
0.66%
0.65%
0.64%
0.73%
0.60%
0.66%
0.65%
Explanation / Answer
SOLUTION:
Yield To Call:
If it is held to maturity,
N (Maturity) = 5
Price PV = $1,100
PMT = $90
FV (Par) = $1050
Gives us the rate of 7.4%
Yield To Maturity:
If called in 25 years,
N (Maturity) = 25
Price PV = $1,100
PMT = $90
FV (Par) = $1000
Gives us the rate of 8.06%
YTM