A firms bonds have a maturity of 8 years with a 1000 face va

A firm\'s bonds have a maturity of 8 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 4 years at $1,042, and currently sell at a price of $1,082.07.

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

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

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Solution

Nominal Yield to Maturity = 6.66%

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

-$1,000.00

PV = Present Value =

$1,082.07

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

16

PMT = Payment = Coupon / frequency =

-$40.00

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

                    3.3300

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

6.66%

Yield to call = 6.57%

Using financial calculator BA II Plus - Input details:

#

FV = Call price =

$1,042.00

PV = Bond price =

$1,082.07

PMT = Coupon rate x face value / frequency of coupon in a year =

$40.00

N = Year to call x frequency of coupon =

8

CPT > I/Y = Rate =

                    3.2844

Yield to call or Return Investors should expect to earn in % = Rate * 2 /100

6.57%