Case 1: Bond and stock valuation Part I - Bond Yields Arnott International has a bond outstanding that is currently trading at a market price of $1274. The bond has an 9% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bond's indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5 . In Year 5 , the bond may be called at 108% of face value (i.e., call price =$1080 ); but in each of the four years after year 5 , the call premium will decline by 1 percentage point. (Round your answers to two decimal places) 3. If you bought this bond today, do you think you would be more likely to earn the YTM or the YTC? [3 marks] If interest rate remains unchanged from the present level (choose one answer): If interest rate increases significantly from the present level (choose one answer): If interest rate decreases significantly from the present level (choose one answer): 4. If the interest rates remain at their current level in future years, when is the latest that investors might expect the company to call the bond? [ 5 marks] Latest year that investors might expect the company to call the bond: YTC (in \%) if the bond is called back in that latest year = [Total: 14 marks] Case 1: Bond and stock valuation Part I - Bond Yields Arnott International has a bond outstanding that is currently trading at a market price of $1274. The bond has an 9% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bond's indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5 . In Year 5 , the bond may be called at 108% of face value (i.e., call price =$1080 ); but in each of the four years after year 5 , the call premium will decline by 1 percentage point. (Round your answers to two decimal places) 3. If you bought this bond today, do you think you would be more likely to earn the YTM or the YTC? [3 marks] If interest rate remains unchanged from the present level (choose one answer): If interest rate increases significantly from the present level (choose one answer): If interest rate decreases significantly from the present level (choose one answer): 4. If the interest rates remain at their current level in future years, when is the latest that investors might expect the company to call the bond? [ 5 marks] Latest year that investors might expect the company to call the bond: YTC (in \%) if the bond is called back in that latest year = [Total: 14 marks]
