Question

five years ago, your firm issued $1,000 par, 25-year bonds, with a 10% coupon rate and a 11% call premium. assume semiannual compounding. if these bonds are now called, what is the actual yield to call for the investors who originally purchased them at par? do not round intermediate calculations. round your answer to two decimal places. % annually if the current interest rate on the bond is 5% and the bonds were not callable, at what price would each bond sell? do not round intermediate calculations. round your answer to the nearest cent. $

Answer 1

The actual yield to call for the investors who originally purchased the bonds at par would be 12%. The price at which each bond would sell when the current interest rate on the bond is 5% and the bonds are not callable can be calculated using the present value formula.

When a bond is called, the issuer pays back the investors before the maturity date. In this case, if the bonds are called, the actual yield to call for the investors who originally purchased them at par would be 12%. This is calculated by taking the difference between the call price (par value + call premium) and the purchase price, dividing it by the purchase price, and then converting it to a percentage.

For the second part of the question, when the current interest rate on the bond is 5% and the bonds are not callable, the price at which each bond would sell can be calculated using the present value formula. The present value of the bond is the sum of the present value of the coupon payments and the present value of the face value. By discounting the future cash flows at the market interest rate, the price of the bond can be calculated.