ESSENTIALS OF INVESTMENTS>LL<+CONNECT
ESSENTIALS OF INVESTMENTS>LL<+CONNECT
11th Edition
ISBN: 9781264001026
Author: Bodie
Publisher: MCG
Question
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Chapter 10, Problem 32PS
Summary Introduction

(A)

To calculate:

The yield to call on a8%coupon bond having30-year maturity with paying coupons semiannually and is callable in5years at a call price of$1,100.

Introduction:

A Callable bond is a bond issued by the company for making money funds adding a feature of calling that bond back at any time before maturity when the interest rates in the market are in decline mode.

Yield to maturity is the rate which determines the return on bond from the period it is bought till its maturity.

Yield to call is the rate which determines the return of the investor from the time it is bought till the time it is called back.

Expert Solution
Check Mark

Answer to Problem 32PS

The yield to call on a8%coupon bond withcallable in5years at a call price of$1,100is6.74%.

Given:

A8%coupon bond having30-year maturity with paying coupons semiannually and is callable in5years at a call price of$1,100. Its yield to maturity is7%.

Explanation:

The formula for computing price of the bond as follows:

  PV=t=1nPMT(1+r)1+FV(1+r)n

Here,

PV is Current price of the bond

FV is Face value of the bond

  ris yield to maturity

  nis no. of periods

For computing yield to call, the following data is entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  1

The following are the output results for the data entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  2

Thus, the current price of the bond is$1,124.72and the yield to call is6.74%.

Explanation of Solution

Given:

A8%coupon bond having30-year maturity with paying coupons semiannually and is callable in5years at a call price of$1,100. Its yield to maturity is7%.

The formula for computing price of the bond as follows:

  PV=t=1nPMT(1+r)1+FV(1+r)n

Here,

PV is Current price of the bond

FV is Face value of the bond

  ris yield to maturity

  nis no. of periods

For computing yield to call, the following data is entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  3

The following are the output results for the data entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  4

Thus, the current price of the bond is$1,124.72and the yield to call is6.74%.

Summary Introduction

(B)

To calculate:

The yield to call on a8%coupon bond having30-year maturity with paying coupons semiannually and is callable in5years at a call price of$1,050.

Introduction:

A Callable bond is a bond issued by the company for making money funds adding a feature of calling that bond back at any time before maturity when the interest rates in the market are in decline mode.

Yield to maturity is the rate which determines the return on bond from the period it is bought till its maturity.

Yield to call is the rate which determines the return of the investor from the time it is bought till the time it is called back.

Expert Solution
Check Mark

Answer to Problem 32PS

The yield to call on a8%coupon bond with callable in5years at a call price of$1,050is5.95%.

Given:

A8%coupon bond having30-year maturity with paying coupons semiannually and is callable in5years at a call price of$1,050. Its yield to maturity is7%.

Explanation:

The formula for computing price of the bond as follows:

  PV=t=1nPMT(1+r)1+FV(1+r)n

Here,

PV is Current price of the bond

FV is Face value of the bond

  ris yield to maturity

  nis no. of periods

For computing yield to call, the following data is entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  5

The following are the output results for the data entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  6

Thus, the current price of the bond is$1,124.72and the yield to call is5.95%.

Explanation of Solution

Given:

A8%coupon bond having30-year maturity with paying coupons semiannually and is callable in5years at a call price of$1,050. Its yield to maturity is7%.

The formula for computing price of the bond as follows:

  PV=t=1nPMT(1+r)1+FV(1+r)n

Here,

PV is Current price of the bond

FV is Face value of the bond

  ris yield to maturity

  nis no. of periods

For computing yield to call, the following data is entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  7

The following are the output results for the data entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  8

Thus, the current price of the bond is$1,124.72and the yield to call is5.95%.

Summary Introduction

(C)

To calculate:

The yield to call on a8%coupon bond having30-year maturity with paying coupons semiannually and is callable in2years at a call price of$1,100.

Introduction:

A Callable bond is a bond issued by the company for making money funds adding a feature of calling that bond back at any time before maturity when the interest rates in the market are in decline mode.

Yield to maturity is the rate which determines the return on bond from the period it is bought till its maturity.

Yield to call is the rate which determines the return of the investor from the time it is bought till the time it is called back.

Expert Solution
Check Mark

Answer to Problem 32PS

The yield to call on a8%coupon bond with callable in2years at a call price of$1,100is6.06%.

Given:

A8%coupon bond having30-year maturity with paying coupons semiannually and is callable in2years at a call price of$1,100. Its yield to maturity is7%.

Explanation:

The formula for computing price of the bond as follows:

  PV=t=1nPMT(1+r)1+FV(1+r)n

Here,

PV is Current price of the bond

FV is Face value of the bond

  ris yield to maturity

  nis no. of periods

For computing yield to call, the following data is entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  9

The following are the output results for the data entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  10

Thus, the current price of the bond is$1,124.72and the yield to call is6.06%.

Explanation of Solution

Given:

A8%coupon bond having30-year maturity with paying coupons semiannually and is callable in2years at a call price of$1,100. Its yield to maturity is7%.

The formula for computing price of the bond as follows:

  PV=t=1nPMT(1+r)1+FV(1+r)n

Here,

PV is Current price of the bond

FV is Face value of the bond

  ris yield to maturity

  nis no. of periods

For computing yield to call, the following data is entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  11

The following are the output results for the data entered in the spreadsheet:

ESSENTIALS OF INVESTMENTS>LL<+CONNECT, Chapter 10, Problem 32PS , additional homework tip  12

Thus, the current price of the bond is$1,124.72and the yield to call is6.06%.

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