Question

Arnot international's bonds have a current market price of $1,200. The binds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity.the bonds may be called in 5 years at 109% of face value(call price = $1,090).

need to know the yield to maturnity? what is the yield to call if they called in 5 years?

Answer 1

The Yield to Maturity= 8.02%

The Yield to Call, if they call in 5 years= 7.6%

Step-by-step explanation:

Step 1: Identify Values Provided

Current Market Price= $1,200

Face Value at Maturity= $1,000

Face Value at Call= $1,090

Step 2: Solve for Annual Annuity and Calculate Yield to Maturity

Annual Annuity = (Face Value x Coupon Rate)

= ($1,000×0.11 or 11%)= $110

Years to Maturity (N to Maturity)= 10 Years

Solve for Yield to Maturity

[(Face value / Present value) ∧ (1/Time period]-1

Solve for Yield to Maturity - (FV@Maturity 1,000, N 10, PV 1,200, ANN 110) YTM = 8.02%

Solve for Yield to Call

Annual Annuity = (Face Value x Coupon Rate)

= ($1,000×0.11 or 11%)= $110

Years to Call (N to Call)= 5 Years.

Formula for Yield to Call= P = (C / 2) x {(1 - (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)

Solve for Yield to Call -

(FV @ Call 1,090, N 5, PV 1,200, ANN 110) YTC = 7.6%

Note: The Easiest way to calculate the Yields is to get the values as started in the steps above then use excel or an online calculator to solve due to the compliated nature of the formula.

I hope this helps