Last year Carson Industries issued a 10-year, 14% 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 $1,300.

A. 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?

i. Select-Since the YTM is above the YTC, the bond is likely to be called.

ii.Since the YTC is above the YTM, the bond is likely to be called.

iii. Since the YTM is above the YTC, the bond is not likely to be called.

iv. Since the YTC is above the YTM, the bond is not likely to be called.

v.Since the coupon rate on the bond has declined, the bond is not likely to be called.

B. 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?

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

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

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

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

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

C. 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?

i.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.

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

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

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

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

Footnote 6

Brokerage houses occasionally report a bond's current yield, defined as the annual interest payment divided by the current price. For example, if Allied's 8% coupon bonds were selling for $981.60, the current yield would be $80/$981.60 = 8.15%. Unlike the YTM or YTC, the current yield does not represent the actual retum that investors should expect because it does not account for the capital gain or loss that will be realized if the bond is held until it matures or is called. The current yield was popular before calculators and computers came along because it was easy to calculate. However, it can be misleading, and now it's easy enough to calculate the YTM and YTC