Question

A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 4 years at $1,044.00, and currently sell at a price of $1,086.20. 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: %

Answer 1

The student's question relates to the calculation of a bond's nominal yield to maturity (YTM) and yield to call (YTC). To provide an accurate answer, bond valuation formulas must be applied, considering the bond's characteristics and how they are influenced by prevailing interest rates.

Step-by-step explanation:

The question at hand involves calculating both the nominal yield to maturity (YTM) and the nominal yield to call (YTC) of a firm's bonds. With a maturity of 8 years and callable in four years, these bond characteristics significantly impact their YTM and YTC, both of which are distinct calculations to determine the bond's yield assuming it is held until maturity or called on the earliest date possible, respectively. Both YTM and YTC can be affected by changes in prevailing interest rates. If interest rates rise, bonds previously issued at lower rates will sell for less than face value (a discount), whereas if rates fall, bonds issued at higher rates will sell for more than face value (a premium), as in the case of the bond in question. For this specific bond, the YTM and YTC would need to be calculated using the formulae for bond valuation, taking into account the price, face value, coupon rate, time to maturity or call, and the price at which the bond can be called.