homework finances 5-22

homework finances 5-22 - and interest rates remain at their...

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Daiyana Cales Principle Finance Management Homework: 5-22 Answer: A. What is the Yield to maturity? N= 10 years, PV= $ 1200, FV= $1000 PMT= 11% * $1000= $110 YTM= rate (10, -1200, 1000, 110) = 8.02% YTM= 8.02% B. What is the Yield to call if they are called in 5 years? YTC at Y5 N= 5 years, PV= $1200, FV= $1000*1.09= $1090, PMT=$110 YTC= rate (5, 110, -1200, 1090) =7.59% YTC= 7.59% C. D. 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, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. 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 on. If the yield curve is horizontal
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Unformatted text preview: and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds? For YTC, Y6 N= 4 years, PV= $1200, FV= $1000*1.08= $1080 PMT= $110 YTC= rate (4, 110, -1200, 1080) = 6.91% For YTC, Y7 N= 3 years, PV=$1200, FV=$1000*1.07=$1070 PMT=$110 YTC=rate (3, 110,-1200, 1070) =5.76% For YTC, Y8 N=2 years, PV=$1200, FV=$1000*1.06=$1060 PMT=$110 YTC=rate (2, 110,-1200, 1060) = 3.43% For YTC, Y9 N=1 year, PV=$1200, FV=$100*1.05=$1050 PMT=$110 YTC=rate (1, 110,-1200, 1050) = -3.33% As a result, investor usually consider the lower of the yield to call and the yield to maturity as the more indication of the return an investor will actually receive on a callable bond. So, the Firm may call the bond in 9 th year....
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This note was uploaded on 07/25/2011 for the course ECON 101 taught by Professor Herman during the Spring '11 term at Sullivan.

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homework finances 5-22 - and interest rates remain at their...

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