Prob 7-12

YIELD TO CALL It is now January 1, 2009, and you are considering the purchase of an
outstanding bond that was issued on January 1, 2007. It has a 9.5% annual coupon and had
a 30-year original maturity. (It matures on December 31, 2036.) There is 5 years of call
protection (until December 31, 2011), after which time it can be called at 109that is, at
109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling
at 116.575% of par, or $1,165.75.
a. What is the yield to maturity? What is the yield to call?
b. If you bought this bond, which return would you actually earn? Explain your reasoning.
c. Suppose the bond had been selling at a discount rather than a premium.Would the yield to
maturity have been themost likely return, orwould the yield to call have beenmost likely?

a. What is the yield to maturity? What is the yield to call?

YTC is 7%
YTM is 8%

b. If you bought this bond, which return would you actually earn? Explain your reasoning.

If I would have bought the bond I would have earned 7% since it would be called in 5 years time.

c. Suppose the bond had been selling at a discount rather than a premium.Would the yield to
maturity have been themost likely return, orwould the yield to call have beenmost likely?

I din't understand this part.

 Value
Issue Date 1/1/2007
Present Date 1/1/2009 $1,165.75
Annual Rate 9.50%
Maturity 30 years 31/12/2036 $1,090

YTM N I PV PMT FV
30 -1165.75 95 1000
YTM -8%

YTC N I PV PMT FV
3 -1165.75 95 1090

-6.11%
An 8% semiannual coupon bond matures in 5 years. The bond has a
face value of $1,000 and a current yield of 8.21%. What are the bonds price and YTM?

Int Rate 8% INT 0.04

Maturity 5 Years N 10
Current Yield 8.21% PMT 40
Face Value 1000
PMT 80
PV $ 992.00

PV ($992)

YTM 4.10%
YTM Annually 8.20%

The Bond Value $ 992.00

YTM is 8.2%

Current Yield Annual Int/PV

974.4214372716
0.82
0.41

8.21 4.105 0.04105

7-14 EXPECTED INTEREST RATE Lloyd Corporations 14% coupon rate, semiannual payment,
$1,000 par value bonds, which mature in 30 years, are callable 5 years from today at $1,050.
They sell at a price of $1,353.54, and the yield curve is flat. Assume that interest rates are
expected to remain at their current level.
a.
b. What is plans
If Lloyd the best estimate
to raise of these
additional bonds
capital andremaining
wants to life?
use debt what coupon
rate would it have to set in order to issue new bonds at par?

SEMi-Annual
Int 14% 0.07
Maturity 30 Year 60
Call 5 Year 10
Call Value $ 1,050
PV $ 1,354 $ (1,354)
pmt 70
fv 1000

Value Of Bond N I PV PMT FV

60 $ (1,354) 70 1000
YTM 5.10%
YTM Annual 10.20%

YTC N I PV PMT FV
10 $ 1,354 70 1050
YTC 3.23%
YTC-Annual 6.46%
YTC-Effect 6.57%

The Coupoun Rate 14.00%

YTC-Annual 6.46%
YTC-Effect 6.57%
YTM -Annual 10.20%

a. What is the best estimate of these bonds remaining life?

The best estimate is to call for these bonds in 5 years of times as YTC < Coupoun Rate at the time of call.
b. If Lloyd plans to raise additional capital and wants to use debt financing what coupon
rate would it have to set in order to issue new bonds at par?

Lloyd will need to reissue the rate 6.5% to reissue at par.

 0.14 0.07

($834.72)
BOND VALUATION Bond X is noncallable and has 20 years to maturity, a 9% annual
coupon, and a $1,000 par value. Your required return on Bond X is 10%; and if you buy it,
you plan to hold it for 5 years. You (and the market) have expectations that in 5 years,
the yield to maturity on a 15-year bond with similar risk will be 8.5%. How much should
you be willing to pay for Bond X today? (Hint: You will need to know how much the bond
will be worth at the end of 5 years.)

FV 1000 PV ($1,041.52)
Annual Coupoun 8.5%
Maturity 15
PMT 90

PV of Bond after 5 Years $ 1,041.52

FV 1041.52
Annual Coupoun 9%
Maturity 5
Bond Value $987.87 PV ($987.87)
YTM 10

Bond Value
20 Year Maturity Bond Value for 5 years $ 962.09
15 Year Maturity Bond Value for 5 Years $ 943.14