Problem 7-11 Bond yields One year ago Clark Company issued a 10-year, 15% semian
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Question
Problem 7-11
Bond yields
One year ago Clark Company issued a 10-year, 15% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,075, and it now sells for $1,180.
What is the bond's nominal yield to maturity? Round your answer to two decimal places.
%
What is the bond's nominal yield to call? Round your answer to two decimal places.
%
What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.
%
What is the expected capital gains (or loss) yield for the coming year? Round your answer to two decimal places.
%
Problem 7-12
Yield to call
It is now January 1, 2014, and you are considering the purchase of an outstanding bond that was issued on January 1, 2012. It has a 8.5% annual coupon and had a 15-year original maturity. (It matures on December 31, 2026.) There is 5 years of call protection (until December 31, 2016), 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 111.545% of par, or $1,115.45.
What is the yield to maturity? Round your answer to two decimal places.
%
What is the yield to call? Round your answer to two decimal places.
%
Explanation / Answer
Problem 7-11
Bond yields
One year ago Clark Company issued a 10-year, 15% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,075, and it now sells for $1,180.
What is the bond's nominal yield to maturity? Round your answer to two decimal places.
YTM = rate(nper,pmt,pv,fv) * 2
Nper (indicates the period) = (10-1)*2 = 18
PV (indicates the price) = 1180
PMT (indicate the semi annual payment) = 1000*15%*1/2 = 75
FV (indicates the face value) = 1000
Rate (indicates YTM) = ?
YTM = rate( 18,75,-1180,1000)*2
YTM = 11.71%
What is the bond's nominal yield to call? Round your answer to two decimal places.
YTC = rate(nper,pmt,pv,fv) * 2
Nper (indicates the period) = (6-1)*2 = 10
PV (indicates the price) = 1180
PMT (indicate the semi annual payment) = 1000*15%*1/2 = 75
FV (indicates the call value) = 1075
Rate (indicates YTC) = ?
YTC = rate( 10,75,-1180,1075)*2
YTC = 11.34%
What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.
Current yield = semi annual payment/Current price * 2
Current yield = 75/1180 * 2
Current yield = 12.71%
What is the expected capital gains (or loss) yield for the coming year? Round your answer to two decimal places.
%
Epected capital gains (or loss) yield = YTM - Current yield
Epected capital gains (or loss) yield = 11.71% - 12.71%
Epected capital gains (or loss) yield = - 1%
Problem 7-12
Yield to call
It is now January 1, 2014, and you are considering the purchase of an outstanding bond that was issued on January 1, 2012. It has a 8.5% annual coupon and had a 15-year original maturity. (It matures on December 31, 2026.) There is 5 years of call protection (until December 31, 2016), 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 111.545% of par, or $1,115.45.
What is the yield to maturity? Round your answer to two decimal places.
YTM = rate(nper,pmt,pv,fv)
Nper (indicates the period) = 15 - 2 = 13 year
PV (indicates the price) = 1115.45
PMT (indicate the annual payment) = 1000*8.5% = 85
FV (indicates the face value) = 1000
Rate (indicates YTM) = ?
YTM = rate( 13,85,-1115.45,1000)
YTM = 7.11%
What is the yield to call? Round your answer to two decimal places.
YTC = rate(nper,pmt,pv,fv)
Nper (indicates the period) = 15 - 2 = 13 year
PV (indicates the price) = 1115.45
PMT (indicate the annual payment) = 1000*8.5% = 85
FV (indicates the call value) = 1090
Rate (indicates YTC) = ?
YTC = rate( 3,85,-1115.45,1090)
YTC = 6.91%