It is now January 1, 2018, and you are considering the purchase of an outstanding bond that was issued on January 1, 2016. It has an 8% semi-annual coupon and had a 30-year original maturity. (It matures on December 31, 2045.) There is 5 years of call protection (until December 31, 2020), after which time it can be called at 108—that is, at 108% of par. Interest rates have declined since it was issued, and it is now selling at 119.12% of par. A. What is the yield to maturity? What is the yield to call? B. If you bought this bond, which return would you actually earn? Explain your reasoning. C. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely? If the answer of yield to maturity is increased by 7% then what will be the present value of bond?
It is now January 1, 2018, and you are considering the purchase of an outstanding bond that was issued
on January 1, 2016. It has an 8% semi-annual coupon and had a 30-year original maturity. (It matures
on December 31, 2045.) There is 5 years of call protection (until December 31, 2020), after which time
it can be called at 108—that is, at 108% of par. Interest rates have declined since it was issued, and it is
now selling at 119.12% of par. A. What is the yield to maturity? What is the yield to call? B. If you bought
this bond, which return would you actually earn? Explain your reasoning. C. Suppose the bond had been
selling at a discount rather than a premium. Would the yield to maturity have been the most likely
return, or would the yield to call have been most likely? If the answer of yield to maturity is increased
by 7% then what will be the present
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