Final answer:
The nominal yield to maturity (YTM) and nominal yield to call (YTC) help determine the returns on a bond investment. The YTM is 12% for our example, while the current yield is 8.30%. The likelihood of earning the YTM or YTC depends on interest rates and the issuer's decisions.
Step-by-step explanation:
The nominal yield to maturity (YTM) and nominal yield to call (YTC) are important metrics in bond investing. If we assume a bond with a face value of $1,000, a coupon rate of 8%, and a current price of $964, the yield to maturity represents the total return an investor can expect if they hold the bond until it matures. Similarly, yield to call represents the total return if the bond is called by the issuer before it reaches maturity.
Using the example provided:
- The investor will receive the face value of $1,000 plus the final year's interest payment of $80.
- The yield will be calculated as follows: (($1,080 - $964) / $964) × 100 = 12%.
The current yield is calculated by dividing the annual interest payment by the bond's current market price. Thus, for an $80 interest payment on a bond selling for $964, the current yield would be ($80 / $964) × 100 = 8.30%.
An investor may be more likely to earn the YTM or the YTC depending on interest rate movements and the issuer's actions. If interest rates rise, the bond price might decrease, and vice versa. Whether the bond is held to maturity or called will affect which yield the investor will ultimately receive.