7 10 Current yield, capital gains yield, and yield to maturity Hooper Printing Inc has bonds outstanding with 9 years left to maturity The bonds have an 9 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 $910 30 The capital gains yield last year was 8 97 What is the yield to maturity Round your answer to two decimal places For the coming year, what is the expected current yield (Hint Refer to Footnote 7 for the definition of the current yield and to Table 7 1 ) Round your answer to two decimal places For the coming year, what is the expected capital gains yield (Hint Refer to Footnote 7 for the definition of the current yield and to Table 7 1 ) Round your answer to two decimal places 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 7 15 Bond X is noncallable and has 20 years to maturity, a 7 annual coupon, and a $1,000 par value Your required return on Bond X is 10 and if you buy it, you plan to hold it for 5 years You (and the market) have expectations that in 5, years the yield to maturity on a 15 year bond with similar risk will be 7 How much should you be willing to pay for Bond X today (Hint You will need to know how much the bond will be worth at the end of 5 years ) Round your answer to the nearest cent $ 7 18 Yield to maturity and yield to call Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity They have an 10 annual coupon payment, and their current price is $1,175 The bonds may be called in 5 years at 109 of face value (Call price $1,090) What is the yield to maturity Round your answer to two decimal places What is the yield to call if they are called in 5 years 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 YTM is less than the YTC 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 Select IIIIIIIVV 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 In Year Select 56789 Problem 5 27 Effective versus nominal interest rates Bank A pays 8 5 interest compounded annually on deposits, while Bank B pays 7 5 compounded daily Based on the EAR (or EFF ), which bank should you use You would choose Bank A because its EAR is higher You would choose Bank B because its EAR is higher You would choose Bank A because its nominal interest rate is higher You would choose Bank B because its nominal interest rate is higher You are indifferent between the banks and your decision will be based upon which one offers you a gift for opening an account Select IIIIIIIVV Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank A might be preferable If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you have no intentions of making a withdrawal during the year, then Bank B might be preferable If funds must be left on deposit until the end of the compounding period (1 day for Bank A and 1 year for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank B might be preferable If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank B might be preferable If funds must be left on deposit until the end of the compounding period (1 day for Bank A and 1 year for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank A might be preferable Select IIIIIIIVV

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7.10 Current yield, capital gains yield, and yield to maturity Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have

7.10

Current yield, capital gains yield, and yield to maturity

Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 9% 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 $910.30. The capital gains yield last year was - 8.97%.

What is the yield to maturity? Round your answer to two decimal places. %
For the coming year, what is the expected current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. % For the coming year, what is the expected capital gains yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. %
Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

7.15

Bond X is noncallable and has 20 years to maturity, a 7% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; and if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5, years the yield to maturity on a 15-year bond with similar risk will be 7%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Round your answer to the nearest cent.

7.18

Yield to maturity and yield to call

Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 10% annual coupon payment, and their current price is $1,175. The bonds may be called in 5 years at 109% of face value (Call price = $1,090).

What is the yield to maturity? Round your answer to two decimal places. %
What is the yield to call if they are called in 5 years? Round your answer to two decimal places. %
Which yield might investors expect to earn on these bonds? Why?
1. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
2. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
3. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
4. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
5. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

-Select-IIIIIIIVV

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? In Year -Select-56789.

Problem 5-27 Effective versus nominal interest rates

Bank A pays 8.5% interest compounded annually on deposits, while Bank B pays 7.5% compounded daily.

Based on the EAR (or EFF%), which bank should you use?
1. You would choose Bank A because its EAR is higher.
2. You would choose Bank B because its EAR is higher.
3. You would choose Bank A because its nominal interest rate is higher.
4. You would choose Bank B because its nominal interest rate is higher.
5. You are indifferent between the banks and your decision will be based upon which one offers you a gift for opening an account.

-Select-IIIIIIIVV

Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.
1. If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank A might be preferable.
2. If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you have no intentions of making a withdrawal during the year, then Bank B might be preferable.
3. If funds must be left on deposit until the end of the compounding period (1 day for Bank A and 1 year for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank B might be preferable.
4. If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank B might be preferable.
5. If funds must be left on deposit until the end of the compounding period (1 day for Bank A and 1 year for Bank B), and you think there is a high probability that you will make a withdrawal during the year, then Bank A might be preferable.

-Select-IIIIIIIVV