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Yield to Call and Yield to maturity bonds problems.

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1) YIELD TO CALL: Six yrs ago, the Singleton Co issued 20-yr bonds with 14 percent annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 yrs of call protection. Today singleton called the bonds, Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Explain why the investor should or should not be happy that Singleton called them

2) Yield to maturity: Heyman Co bonds have 4 yrs left to maturity, Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

a. What is the yield to maturity at a current market price of (1) $829 or (2) $1,104?
b. Would you pay $829 for each bond if you thought that a "fair" market interest rate for such bonds was 12 %-that is if rd=12% Explain your answer.

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1.YIELD TO CALL: Six yrs ago, the Singleton Co issued 20-yr bonds with 14 percent annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 yrs of call protection. Today singleton called the bonds, Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Explain why the investor should or should not be happy that Singleton called them.

Investor should not be happy that Singleton called the bond because the main reason that the company called back the bond is that the interest rate in the market fell below the annual coupon rate of 14%. Therefore, the investor will lose their opportunity to earn the higher coupon rate for the remaining 15 years.

When Singleton called the bond, they will pay 9% call premium. Therefore, the calling price is equal to $1,090.

We need to calculate the realized rate of return ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to compute Yield to Call and Yield to maturity of bonds.

$2.19
See Also This Related BrainMass Solution

Spreedsheet Problem - Bonds and Stocks

7-8 Bond yields:
A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000, may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)
a. What is the bond's yield to maturity?
b. What is the bond's current yield?
c. What is the bond's capital gain or loss yield?
d. What is the bond's yield to call?

7-22 Bond Valuation
Rework Problem 7-8 using a spreadsheet model. After completeing parts a through d, answer the following related questions.
e. How would the price of the bond be affected by changing interest rates? Hint: Conduct a sensitivity analysis of price to change in the yield to maturity, which is also the going market interest rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)

f. Now assume that the date is 10/25/2002. Assume further that our 12 percent, 10-year bond was issued on 7/01/2002, is callable on 7/01/2006 at $1,060, will mature on 6/30/2012, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to find (1) the bond's yield to maturity and (2) its yield to call.

I need help with problem set 7-8 questions a through d in excel and problem set 7-22 e and f. No need to re-write the questions. Just show Question "a", Question "b"...Question "f" with excel.

Thanks.

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