A 30-year maturity, 8% coupon bond paying coupons semiannually is callable in five years at a call price of $1,020. The bond currently sells at a yield to maturity of 7.50% (3.75% per half-year). a. What is the yield to call annually? (Do not round intermediate calculations. Round your answer to 3 decimal places.) Answer is complete but not entirely correct. Yield to call 7.510 X % b. What is the yield to call annually if the call price is only $970? (Do not round intermediate calculations. Round your answer to 3 decimal places.) Answer is complete but not entirely correct. Yield to call 8.750 X %
A 30-year maturity, 8% coupon bond paying coupons semiannually is callable in five years at a call price of $1,020. The bond currently sells at a yield to maturity of 7.50% (3.75% per half-year). a. What is the yield to call annually? (Do not round intermediate calculations. Round your answer to 3 decimal places.) Answer is complete but not entirely correct. Yield to call 7.510 X % b. What is the yield to call annually if the call price is only $970? (Do not round intermediate calculations. Round your answer to 3 decimal places.) Answer is complete but not entirely correct. Yield to call 8.750 X %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
Transcribed Image Text:### Understanding Yield to Call (YTC)
#### Question:
**c. What is the yield to call annually if the call price is $1,020, but the bond can be called in two years instead of five years? (Negative amounts should be shown with a minus sign. Do not round intermediate calculations. Round your answer to 3 decimal places.)**
#### Answer Provided:
**Yield to call: 6.910%**
#### Feedback:
The answer provided is complete but not entirely correct.
### Explanation:
In calculating the yield to call (YTC), you need to consider the call price, the amount of time until the bond can be called, and ensure that all intermediate calculations are not rounded until the final answer. The final answer should be rounded to three decimal places as specified.
The provided YTC of 6.910% suggests that there may have been a minor error in calculation or rounding. Always ensure to follow the calculation steps accurately and verify each part to achieve the correct yield to call percentage.
Transcribed Image Text:### Bond Yield to Call Calculations
Here we have a scenario involving a 30-year maturity bond with an 8% coupon rate that pays semiannual coupons. The bond is callable in five years at a call price of $1,020. Currently, the bond is selling at a yield to maturity of 7.50% (3.75% per half-year).
#### Question a
**What is the yield to call annually?**
*(Do not round intermediate calculations. Round your answer to 3 decimal places.)*
**Given:**
- Maturity of bond: 30 years
- Coupon rate: 8%
- Call period: 5 years
- Call price: $1,020
- Yield to maturity: 7.50% (3.75% per half-year)
**Answer provided:**
- Yield to call: 7.510%
**Feedback:**
The answer is complete but not entirely correct.
#### Question b
**What is the yield to call annually if the call price is only $970?**
*(Do not round intermediate calculations. Round your answer to 3 decimal places.)*
**Given:**
- Call price: $970
- All other parameters remain the same
**Answer provided:**
- Yield to call: 8.750%
**Feedback:**
The answer is complete but not entirely correct.
These questions are critical for understanding how different call prices and periods affect the yield a bond investor can expect if the bond is called before its maturity date. The annual yield to call gives investors an important measure to compare bonds with different features and call provisions.
#### Explanation of the Feedback:
The feedback indicates that while the methods to arrive at the answers are being applied correctly, there may be minor calculation or rounding errors. It is essential to carefully follow through each step of the financial calculations and ensure precision in each intermediate step to arrive at the correct final yields.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education