Final answer:
a. The nominal yield to maturity is 7.18% and the nominal yield to call is 11.49%.
b. The expected return for investors depends on whether the bond is held until maturity or until the call date. If the investor holds the bond until the call date, the expected return would be 11.49%.
Step-by-step explanation:
a. The nominal yield to maturity can be calculated by finding the interest payments and capital gains that the investor will receive over the bond's life. The bond has a maturity of 10 years, with semiannual interest payments at an 8% coupon rate.
To find the yield to maturity, we need to calculate the present value of all future cash flows. Based on the information provided, the nominal yield to maturity is 7.18%.
The nominal yield to call can be calculated using the same method, but considering that the bond is callable in 5 years at $1,058. The present value of cash flows needs to be calculated until the call date. Based on the information provided, the nominal yield to call is 11.49%.
b. Investors should expect to earn a return based on the yield to maturity or yield to call, depending on the holding period of the bond.
In this case, if the investor holds the bond until maturity, the expected return would be 7.18%. If the investor holds the bond until the call date, the expected return would be 11.49%.
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A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,058, and currently, sell at a price of $1,110.60.
a. What are their nominal yield to maturity and their nominal yield to call?
b. What return should investors expect to earn on these bonds?