In the section on the yield to call, a bond pays annual interest of $80 and matu
ID: 2766627 • Letter: I
Question
In the section on the yield to call, a bond pays annual interest of $80 and matures after ten years. The bond is valued at $1,147 if the comparable rate is 6 percent and the bond is held to maturity. If, however, an investor expects the bond to be called for $1,050 after five years, the value of the bond would be $1,122. Investor A expects the bond to be called and investor B expects the bond not to be called. Investor A sells the bond to B for $1,122. What is the annual return earned by B if the bond is not called? Why is this yield greater than the 6 percent earned on comparable securities?Explanation / Answer
Ans;
What is the annual return earned by B if the bond is not called? = 80/1122*100 = 7.13% answer
This yield is greater as the 6% yield is calculated on the price of 1147, however the price B pays for it is lesser at 1122