posted by Mel .
Yield to call
Six years ago, the Singleton Company issued 20-year bonds with a 14 percent annual coupon rate at their $1,000 par value. The bonds had a 9 percent call premium, with 5 years 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.
Current yield, capital gains yield, and yield to maturity
Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8 percent annual coupon rate and were issued 1 year ago at their par value of $1,000, but due to changes in interest rates, the bond’s market price has fallen to $901.40. The capital gains yield last year was _9.86 percent.
a. What is the yield to maturity?
b. For the coming year, what is the expected current yield and the expected capital gains yield?
c. Will the actual realized yields be equal to the expected yields if interest rates
change? If not, how will they differ?
I don't know either
Q1. FV= (1000*.09)+1000= 1090, PV= -1000, n=6, pmt= 140. Cpt I/y= 15.027%. They should be happy because they were making a less (14%) than the 15.027%.
Q3. The current yeild is $80 (the coupon) divided by $901.40 (The current market value). Sorry my calculator is in the other room. It should be a little less than 9%.
Expected Capital gains will be a little less than $10. (1000-901.40)/9 is a quick approximation. Actually, it's 901.40 times the ninth root of (1000/901.40 - 1) [if I remember the formula that I learned about 25 years ago].
Now "C". Current yield will be the same regardless of the change in interest rates. Unrealized Capital Gains will be higher if interest rates go lower and lower if interest rates rise.
Now A. The current yield to maturity is the sum of the rates mentioned in B above.
I'm calling this up out of a 25 year old memory, so check with your text book to see if I got it. Hope it helps.