6 A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of 7 $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.) 8 9 Basic Input Data: LO Years to maturity: 20 11 Periods per year: 2. 12 Periods to maturity: 13 Coupon rate: 8% 14 Par value: $1,000 15 Periodic payment: 16 Current price $1,100 17 Call price: $1,040 18 Years till callable: 5 19 Periods till callable: 20 1 a. What is the bond's yield to maturity? -2 -3 Peridodic YTM = -4 Annualized Nominal YTM = -5 -6 -7 b. What is the bond's current yield? Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted. Current yield Current yield Current yield Hint: Write formula in words. Hint: Cell formulas should refer to Input Section (Answer) -9 FO 1 -2 -3 -4 5 c. What is the bond's capital gain or loss yield? Cap. Gain/loss yield Cap. Gain/loss yield Cap. Gain/loss yield 7 8 9 -0 = Hint: Write formula in words. Hint: Cell formulas should refer to Input Section (Answer) Note that this is an economic loss, not a loss for tax purposes. 1 d. What is the bond's yield to call? Here we can again use the Rate function, but with data related to the call. Peridodic YTC = Annualized Nominal YTC This is a nominal rate, not the effective rate. Nominal rates are generally quoted. The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and the current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be called and replaced, hence that the YTC will probably be earned