Question

The Hale Theater bonds currently sell for $1,075. They pay a $110 annual coupon, have a 30 -year maturity, and a par value of $1,000, but they can be called in 10 years at $1,450. Which rate would investors expect to earn - the YTM or the VTC?

a) YIC
b) Basically the same
c) YTM
d) None of these are correct

Answer 1

The rate that investors would expect to earn is the c) YTM (yield to maturity).

Step-by-step explanation:

The rate that investors would expect to earn is the YTM (yield to maturity).

The YTM takes into account the current price of the bond, the coupon payments, the par value, and the time until maturity.

In this case, the YTM would be calculated as follows:

1. Calculate the present value of the future cash flows from the bond: PV = (110 / (1 + r) + 110 / (1 + r)^2 + ... + 110 / (1 + r)^30) + 1000 / (1 + r)^30
2. Solve for the yield to maturity (r) using trial and error or a financial calculator.

Based on the calculations, the YTM rate would be the rate that investors expect to earn on the bond.