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Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $917.30. The capital gains yield last year was -8.27%.

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

%

For the coming year, what are the expected current and capital gains yields? (Hint: Refer to Footnote 6 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answers to two decimal places.

Expected current yield: %

Expected capital gains yield: %

Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will not cause the price to change and as a result, the realized return to investors should equal the YTM.

As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.

As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM.

As long as promised coupon payments are made, the current yield will not change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.

As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.

-Select-

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Last year Carson Industries issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,060 and it sells for $1,200.

What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

YTM: %

YTC: %

Would an investor be more likely to earn the YTM or the YTC?

-Select-Since the YTM is above the YTC, the bond is likely to be called.Since the YTC is above the YTM, the bond is likely to be called.Since the YTM is above the YTC, the bond is not likely to be called.Since the YTC is above the YTM, the bond is not likely to be called.Since the coupon rate on the bond has declined, the bond is not likely to be called.Item 3

What is the current yield? (Hint: Refer to Footnote 6 for the definition of the current yield and to Table 7.1) Round your answer to two decimal places.

%

Is this yield affected by whether the bond is likely to be called?

If the bond is called, the capital gains yield will remain the same but the current yield will be different.

If the bond is called, the current yield and the capital gains yield will both be different.

If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different.

If the bond is called, the current yield will remain the same but the capital gains yield will be different.

If the bond is called, the current yield and the capital gains yield will remain the same.

-Select-IIIIIIIVVItem 5

What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calculation, if required. Negative value should be indicated by a minus sign. Round your answer to two decimal places.

%

Is this yield dependent on whether the bond is expected to be called?

The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called.

If the bond is expected to be called, the appropriate expected total return is the YTM.

If the bond is not expected to be called, the appropriate expected total return is the YTC.

If the bond is expected to be called, the appropriate expected total return will not change.

The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.

-Select-

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Lourdes Corporation's 12% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 25 years, are callable 3 years from today at $1,050. They sell at a price of $1,189.19, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

What is the best estimate of these bonds' remaining life? Round your answer to the nearest whole number.

years

If Lourdes plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

Since Lourdes wishes to issue new bonds at par value, the coupon rate should be set the same as the current yield on the existing bonds.

Since interest rates have risen since the bond was first issued, the coupon rate should be set at a rate above the current coupon rate.

Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTC.

Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTM.

Since Lourdes wishes to issue new bonds at par value, the coupon rate should be set the same as that on the existing bonds.

-Select-

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Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have a 10% annual coupon payment, and their current price is $1,170. The bonds may be called in 5 years at 109% of face value (Call price = $1,090).

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

%

What is the yield to call if they are called in 5 years? Do not round intermediate calculations. Round your answer to two decimal places.

%

Which yield might investors expect to earn on these bonds? Why?

Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

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The bond's indenture indicates that the call provision gives the firm the right to call the bonds at the end of each year beginning in Year 5. In Year 5, the bonds may be called at 109% of face value, but in each of the next 4 years, the call percentage will decline by 1%. Thus, in Year 6, they may be called at 108% of face value; in Year 7, they may be called at 107% of face value; and so forth. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds? Do not round intermediate calculations In Year

-Select

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