IV Investors would expect the bonds to be called and to earn the YTC because

# Iv investors would expect the bonds to be called and

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IV. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. V. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC. c. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely? I. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. II. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC. III. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. 6.90 Item 1 4.28 Item 2 IV Item 3 IV. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC. V. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM. Problem 7-14 Expected interest rate Lloyd Corporation's 13% coupon rate, semiannual payment, \$1,000 par value bonds, which mature in 10 years, are callable 4 years from today at \$1,025. They sell at a price of \$1,241.55, and the yield curve is flat. Assume that interest rates are expected to remain at their current level. a. What is the best estimate of these bonds' remaining life? Round your answer to two decimal places. years b.If Lloyd plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par? I. Since Lloyd wishes to issue new bonds at par value, the coupon rate set should be the same as that on the existing bonds. II. Since Lloyd wishes to issue new bonds at par value, the coupon rate set should be the same as the current yield on the existing bonds. III. Since interest rates have risen since the bond was first issued, the coupon rate should be set at a rate above the current coupon rate. IV. Since the bonds are selling at a premium, the coupon rate should be set at the III Item 4 6 Item 1 going rate, which is the YTC. V. Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTM. Hide Feedback Incorrect Post Submission Feedback Solution a. The bond is selling at a large premium, which means that its coupon rate is much higher than the going rate of interest. Therefore, the bond is likely to be called-it is more likely to be called than to remain outstanding until it matures. Therefore, the likely life remaining on these bonds is 4 years (the time to call). b. Since the bonds are likely to be called, they will probably provide a return equal to the YTC rather than the YTM. So, there is no point in calculating the YTM-just calculate the YTC.  #### You've reached the end of your free preview.

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