Consider the case of Badger Corp. Badger Corp. has 9% annual coupon bonds that a
ID: 2784472 • Letter: C
Question
Consider the case of Badger Corp. Badger Corp. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,160.35. However, Badger Corp. may call the bonds in eight years at a call price YTM of $1,060. What are the YTM and the yield to call (YTC) on Badger Corp.'s bonds? Value YTC If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Badger Corp.'s bonds? O 8 years O 5 years O 10 years O 13 yeans If Badger Corp. issued new bonds today, what coupon rate must the bonds have to be issued at par?Explanation / Answer
Face Value (FV) $1,000 Annual coupon 9.00% Coupon Payment = $1000 x 9% $90 Nper = 18 Present Value $1,160.35 YTM = Rate(18,$90,-$1160.35,1000) 7.36% Face Value (FV) $1,060 Annual coupon = 9.00% Coupon Payment = $1000 x 9% $90 Nper = 8 Present Value $1,160.35 YTC = Rate(8,90,-1160.35,1060) 6.91% The YTC is greater than the YTM and If interest rates remain constant, the firm will not call the bonds. The bonds will be held until maturity, so their expected remaining life is 18 years If Badger Co. is to issue new bonds at par, the new bonds must pay a coupon equal to their current YTM = 7.36% .