Question

Ace Products has a bond issue outstanding with 15 years remaining to maturity, a coupon rate of 9% with semiannual payments of $45, and a par value of $1,000. The price of each bond in the issue is $1,180.00. The bond issue is callable in 5 years at a call price of $1,090.

Required:
a. What is the bond's nominal annual yield to maturity (YTM)?
b. What is the bond's nominal annual yield to call (YTC)?
c. Assuming interest rates remain at current levels, will the bond issue be called?

Answer 1

a. Nper = 30

PMT = 45

FV = `1000

Price Pv = -1180

Rate (YTM) = ?

Using the MsExcel Rate function to derive YTM

Nominal annual yield to maturity = Rate(Nper, Pmt, -Pv, Fv) * 2

Nominal annual yield to maturity = Rate(30, 45, -1180, 1000) * 2

Nominal annual yield to maturity = 7.04%

b. Nper = 10

PMT = 45

Call Price = 1090

Price Pv = -1180

Rate (YTC) = ?

Using the MsExcel Rate function to derive YTM

Nominal annual yield to call = Rate(Nper, Pmt, -Pv, Fv) * 2

Nominal annual yield to call = Rate(10, 45, -1180, 1090) * 2

Nominal annual yield to call = 6.31%

C. Yes, the bond issue should call because the YTC is less than the YTM.