Question

Demed Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $980.35. However, Demed Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Demed Inc.’s bonds?

Answer 1

9.23% and 9.89%

Step-by-step explanation:

For computing the yield to maturity and yield to call we have to applied the RATE formula i.e to be shown in the attachment below:

For yield to maturity

Given that,

Present value = $980.35

Assuming figure - Future value or Face value = $1,000

PMT = 1,000 × 9% = $90

NPER = 18 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after applying the above formula, the yield to maturity is 9.23%

For yield to call

Given that,

Present value = $980.35

Future value or Face value = $1,060

PMT = 1,000 × 9% = $90

NPER = 8 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after applying the above formula, the yield to call is 9.89%