Question

eBook Problem Walk-Through 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 $1,052.61, and currently sell at a price of $1,101.93. 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: % YTC: % What return should investors expect

Answer 1

To calculate the nominal yield to maturity (YTM) and nominal yield to call (YTC) for the given bond, you need to consider the bond's current price, face value, coupon rate, call price, and their respective cash flows. The YTM represents the yield if the bond is held until maturity, while the YTC represents the yield if the bond is called by the issuer before maturity. By using these calculations, you can determine the nominal YTM and YTC for the given bond.

Step-by-step explanation:

In order to calculate the nominal yield to maturity (YTM) and nominal yield to call (YTC), we need to use the bond's current price, face value, coupon rate, and call price. The nominal YTM represents the yield if the bond is held until its maturity date, while the nominal YTC represents the yield if the bond is called by the issuer before its maturity date.

For this bond, the YTM can be calculated as follows:

- First, calculate the present value of all future cash flows (the $1,000 face value + semiannual coupon payments) using the YTM as the discount rate.

- Next, solve for the YTM by adjusting the discount rate until the present value equals the bond's current price.

The YTC can be calculated in a similar way, but instead of using the bond's maturity date, we use the call date and call price.

Based on these calculations, the nominal YTM and YTC for the given bond can be determined.