Aziz works for a broker One of his clients is offered to buy

Aziz works for a broker. One of his clients is offered to buy a bond at $1,050. It is a 10%, 15-year bond with a par value of $1,000 and a call price of $1,100. (The bond\'s first call date is in five years.) Coupon payments are made semiannually. a. Find the current yield, YTM, and YTC on this issue. Which of these three yields is the highest? Which is the lowest? Which yield would Aziz use to value this bond? Explain. b. Assume that the price of the bond declines to $875. Now which yield is the highest? Which is the lowest? Which yield would Aziz use to value this bond? Explain.

Solution

FV 1000 FV(Call) 1100 PV 1050 PV 1050 PMT 50 (1000 x 10%/2) PMT 50 (1000 x 10%/2) NPER 30 (15 x 2) NPER 10 (5 x 2) Rate(YTM) 9.37% Rate(YTC) 10.28% =RATE(30,50,-1050,1000)*2 =RATE(10,50,-1050,1100)*2 Current yield = 100/1050 = 9.52% YTM 9.37% lowest Aziz will use YTM to value this bond YTC 10.28% highest Since ytm being lowest has high chances to be earned Current Yield 9.52% FV 1000 FV(Call) 1100 PV 875 PV 875 PMT 50 (1000 x 10%/2) PMT 50 (1000 x 10%/2) NPER 30 (15 x 2) NPER 10 (5 x 2) Rate(YTM) 11.80% Rate(YTC) 15.06% =RATE(30,50,-875,1000)*2 =RATE(10,50,-875,1100)*2 Current yield = 100/875 = 11.43% YTM 11.80% Still Aziz will use YTM to value this bond, since YTC is being YTC 15.06% highest higher, not expected to be earned so remains only YTM Current Yield 11.43% lowest