4. 4: Bonds and Their Valuation: Calculating Yields Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor would ear if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations Current yield, yield to maturity, and yield to call A bond's current yield is calculated as the annual interest payment divided by the current price. Unlike the yield to maturity of the yield to call it does not represent the actual return that investors should expect because it does not account for the capital gain or loss that will be realized of the band is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading, the yield to maturity and Vield to cal are more relevant The yield to maturity (YTM) is the rate of return earned on a bond if it is held to maturity. It is the interest rate that forces the present value of the bond to equal the present alles of the Interest payments received during the tife It the bond and the maturity value received at the band's maturity Calculate YTM using a financial Calculator by entering the number of payment periods until maturity for the price of the bond for PV, the interest payments for PMT, and the maturity value for . Then solve for I/YR WYTM. Remember you need to make the appropriate adjustments for a semiannual bond and realize that the calculated t/YR is on a periodic basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and FV are identical and that the opposite sign is used for PV; otherwise, your answer will be incorrect. The yield to call (YTC) \s the rate of return earned on a bond when it is called before its maturity dott. The equation for solving for the YTC is shown below Call price (1+r) NE tory Price of bond-INT (1+4) Calculate YTC Using a financial calculator by entering the number of payment periods until call for the pnce of the band for the interest payments for at Then you can solve for 1/R - YTC, remember you need to make the appropriate adjustments for a semiannual bond and rate that the calculated/ Dass so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for Myand I are derica and the postes for Potherwise your answer wilt be incorrect A com more key to call its bonds if they are able to replace their current coupon debt with less expensive financing. A bond more to be called tar-because this means that the going market interest rate is less than its coupon Ch 07: Homework Problems. Bonds and Their Valuation X Price of bond INT (1+r) Call price + (1+r) Calculate y using a financial calculator by entering the number of payment periods until Call for N, the price of the bord for PV, the interest payments for PMT, and the call price for FV. Then you can solve for I/YR - YTC. Again, remember you need to make the appropriate adjustments for a semiannual bond and realize that the calculated I/YR is on a periode basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and I are identical and the opposite slon s used for PV; otherwise, your answer will be incorrect A company is more likely to call its bonds if they are able to replace their current high-coupon debt with less expensive financing. A bond is more likely to be called in its prices Bet par-because this means that the going market interest rate is less than its coupon rate Quantitative Problem: Ace Products has a band issue outstanding with 15 years remaining to maturity, a coupon rate of 8.2% with semiannual payments of $41, and a par value of $1,000. The price of each bond in the sun is $1.260.00. The band issue is callable in 5 years at a call price of $1,082 What is the bord's current yield? Do not round Intermediate calculations, round your answer to two decimal places What is the band's nominat annual yaid to maturity (YTM)? Do not round Intermediate calculations, Round your answer to tho decimal places What is the bond's normina annun yield to call (TCY Do not round intermediate calculations. Round your answer to two decimal places Assuming merest rates remainst current levels, wil the bond we be called The firm call the bond