Question

A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 7 years at $1,077.29, and currently sell at a price of $1,142.30. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: 9.48 YTC: 8.93 % What return should investors expect to earn on these bonds? 1. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. 11. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM. 111. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC. IV. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. II

Answer 1

The nominal yield to maturity (YTM) and the nominal yield to call (YTC) for the bonds are 9.48% and 8.93% respectively. Investors would not expect the bonds to be called and would expect to earn the YTM of 9.48% on these bonds.

Step-by-step explanation:

For the firm's bonds, the nominal yield to maturity (YTM) is 9.48% and the nominal yield to call (YTC) is 8.93%. The YTM represents the total return that investors can expect to earn if the bonds are held until their maturity, while the YTC represents the total return if the bonds are called at the specified price before maturity.

In this case, the YTC is lower than the YTM, which suggests that investors would not expect the bonds to be called. Therefore, they would expect to earn the YTM of 9.48% on these bonds.