YIELD TO MATURITY A firms bonds have a maturity of 14 years

YIELD TO MATURITY

A firm\'s bonds have a maturity of 14 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 7 years at $1,078, and currently sell at a price of $1,144.50.

What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

%

What return should investors expect to earn on these bonds?

Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.

Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

-Select-IIIIIIIVV

Solution

Nominal yield to maturity = 6.42%

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

-$1,000.00

PV = Present Value =

$1,144.50

N = Total number of periods = Number of years x frequency =

28

PMT = Payment = Coupon / frequency =

-$40.00

CPT > I/Y = Rate per period or YTM per period =

                      3.2100

Convert Yield in annual and percentage form = Yield*frequency / 100 =

6.42%

Nominal Yield To Call = 6.32%

Using financial calculator BA II Plus - Input details:

#

FV = Call price =

$1,078.00

PV = Bond price =

$1,144.50

PMT = Coupon =

$40.00

N = Year to call =

14

CPT > I/Y = Rate =

                    3.1586

Yield to call or Return Investors should expect to earn in % = Rate*2 =

6.32%

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Correct option is > III. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.