Absalom Motors\' 14% coupon rate, semiannual payment, $1,000 par value bonds tha
ID: 2733683 • Letter: A
Question
Absalom Motors' 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 15 years are callable 5 years from now at a price of $1,050. The bonds sell at a price of $1,353.54, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds? Round your answer to two decimal places.
Please compute by use financial calculator, if you use regular calculator, the answer will be incorrect.
Explanation / Answer
YTM = 4.76%
YTC = 3.30% (Use formula = YTC = {Coupan amount + (Call Pice - Market price) / Number of year for call} / (Call Pice + Market price) / 2
the best estimate of the nominal interest rate on new bonds would be 3.30% semiannualy or 6.60% Annually