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Bond Yields

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1. Consider the Leverage Unlimited, Inc., zero coupon bonds of 2008. The bonds were issued in 1990 for $100. Determine the yield to maturity (to the nearest 1/10 of 1 percent) if the bonds are purchased at the...

a. Issue price in 1990. (Note: To avoid a fractional year holding period, assume that the issue and maturity dates are at the midpoint: July 1of the respective years.)
b. Market price as of July 1, 2004, of $750.
c. Explain why the returns calculated in Parts a and b are different.

2. American Telephone & Telegraph has issued 81/8 percent debentures that will mature on July 15, 2024. Assume that interest is paid and compounded annually. If an investor purchased a $1,000 denomination bond for $1,025 on July 15, 2004, determine the bond's yield to maturity. Explain why an investor would be willing to pay $1,025 for a bond that is going to be worth only $1,000 at maturity.

3. Consider again the American Telephone & Telegraph 8 1/8 percent debentures that mature on July 15, 2024 (see problem 6). Determine the yield to call if the bonds are called on July 15, 2010 at $1,016.55

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** Please see the attached EXCEL file for complete details **

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1. Consider the Leverage Unlimited, Inc., zero coupon bonds of 2008. The bonds were issued in 1990 for $100. Determine the yield to maturity (to the nearest 1/10 of 1 percent) if the bonds are purchased at the
a. Issue price in 1990. (Note: To avoid a fractional year holding period, assume that the issue and maturity dates are at the midpoint "July 1" of the respective years

For a zero coupon bond
Price x (1+Yield)^ number of years = Face value (redemption value)
Therefore, Yield = (face value / price) ^(1/number of years) - 1
(^ means raised to the power of)
Face value= $1,000
Issue Price= $100
Number of years to maturity= 18 (2008-1990)
Therefore yield to maturity= 13.6% =(1000 / 100 )^(1/18)-1
Answer: Yield to maturity= 13.6%

b. Market price as of July 1, 2004, of $750.

Face value= $1,000
Issue Price= $750
Number of years to ...

Solution Summary

Bond yield calculations- yield to maturity, yield to call etc.

$2.19
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Bond Yields-yield to maturity, yield to call, current yield; value of stock

1) Last year Clark company issued a 10-year ,12 % semiannual coupon bond at its par value of $1000. The bond can be called in 4 yrs at a price of $1,060, and it now sells for $1100.

a. What are the bond's yield to maturity and its yield to call? Would an investor be more likely to actually earn the YTM or the YTC?

b What is the current yield? Is this yield affected by whether or not the bond is likely to be called?

c. What is the expected capital gains (or loss) yield for the coming year? Is this yield dependent on whether or not the bond is expected to be called?

2) NON CONSTANT GROWTH: Microtech corporation is expanding rapidly and currently needs to retain all of its earnings, hence it does not pay dividends.However, investors expect Microtech to begin paying dividends, beginning with a dividend of $1.00 coming 3 yrs from today. The dividend should grow rapidly-at a rate of 50 percent per year-during Years 4 and 5, but after Year 5 growth should be a constant 8 % per year. If the required return on Microtech is 15 %,what is the value of the stock today?

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