Calculate the yield to maturity of both bonds. All else being equal, explain which bond the issuing company and the investors in bonds would find more attractive.
Calculate the yield to maturity of both bonds. All else being equal, explain which bond the issuing company and the investors in bonds would find more attractive.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Suppose a company issued two bonds, that have the same degree of default risk and
mature in 20 years. Both bonds are callable at $1,100. The first bond has a par value
of $1,000, a coupon rate of 5%, makes annual coupon payments, and currently sells
for $620. The second one also has a par value of $1,000, pays coupon rate of 7.5%
annually, and its market price is $1,000.
i) Calculate the yield to maturity of both bonds. All else being equal, explain which
bond the issuing company and the investors in bonds would find more attractive.
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