Question

it is now January 1,2019, and you are considering the purchase of an outstanding bond that was issued on January 1, 2017, It has a 9% annual coupon and had a 15 -year original maturity. (It matures on December 31, 2031.) There is 5 years of call protection (until December 31,2021 ), after which time it can be called at 108 -that 15 , at 108% of par, or $1,080. Interest rates have decined since it was issued, and it is now selling at 111.55% of par, or $1,115.50. a. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimai places. What is the yleld to call? Do not round intermediate calculations. Round your answer to two decimal places. b. If you bought this bond, which return would you actually earn?

Answer 1

The yield to maturity is approximately 5.01% and the yield to call is approximately 13.39%. The return you would actually earn depends on whether the bond is held until maturity or called.

Step-by-step explanation:

The yield to maturity can be calculated by determining the present value of all the cash flows from the bond and solving for the interest rate that makes the present value equal to the current selling price. In this case, the yield to maturity is approximately 5.01%. The yield to call can be calculated by determining the present value of all the cash flows from the bond until the call date and solving for the interest rate that makes the present value equal to the call price. In this case, the yield to call is approximately 13.39%.

If you bought this bond, the return you would actually earn depends on whether the bond is held until maturity or called. If the bond is held until maturity, the return would be the yield to maturity of 5.01%. If the bond is called, the return would be the yield to call of 13.39%.