Question

A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 4 years at $1,154, and currently sell at a price of $1,283.09.What is their nominal yield to maturity? Round your answer to two decimal places.

What is their nominal yield to call? Round your answer to two decimal places. %
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 YTM is less than the YTC.
2.Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
3.Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
4.Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC
5.Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

Answer 1

The nominal yield to maturity (YTM) of the bond is 12% and the nominal yield to call (YTC) is 15.14%. Investors would expect the bonds to be called and to earn the YTC.

Step-by-step explanation:

The nominal yield to maturity (YTM) is the yield an investor would receive if they hold a bond until its maturity date. To calculate the YTM of the given bond, we need to consider the bond's current price, face value, and coupon payments. In this case, the YTM is 12%.

The nominal yield to call (YTC) is the yield an investor would receive if the bond is called by the issuer before its maturity date. To calculate the YTC, we need to consider the call price of the bond. In this case, the YTC is 15.14%.

Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM (option 2). When interest rates rise, it becomes more attractive for the issuer to call the bond and refinance at a lower interest rate.