FINANCE

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?

1. 👍
2. 👎
3. 👁
1. I don't know either

1. 👍
2. 👎
2. 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.

1. 👍
2. 👎

Similar Questions

1. Intermediate Accounting

The 10% bonds payable of Klein Company had a net carrying amount of \$570,000 on December 31, 2006. The bonds, which had a face value of \$600,000, were issued at a discount to yield 12%. The amortization of the bond discount was

2. Math

The Garraty company has two bond issues outstanding. Both bonds pa \$100 annual interest plus \$1,000 at maturity. Bond L has a maturity of 15 years and Bond S a maturity of 1 year. A). What will be the value of each of these bonds

3. accounting

herman company received proceeds of \$188,500 on 10-year, 8% bonds issued on january 1, 2009. the bonds had a face value of \$200,000, pay interest semi-annually on june 30 and december 31, and have a call price of 101. herman uses

4. Finance

Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, the YTM is ? percent

1. finance

Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of \$1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19

2. Finance

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of \$1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they

3. finance

he bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11 years and have a \$1,000 face value. Currently, the bonds sell for \$989. What is the yield to maturity?

4. Herzing

On March 15, a 20-year, \$5000 par value bond series with annual interest of 9 percent was issued. Three thousand of these bonds were issued at a price of 98. Interest is paid semiannually.

1. math

Midland Oil has \$1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is: A. 7 percent. B. 10 percent. C. 13 percent.

2. Finance

Suppose that five years ago Cisco Systems sold a 15-year bond issue that had a \$1,000 par value and a 7 percent coupon rate. Interest is paid semiannually. a. If the going interest rate has risen to 10 percent, at what price would

3. fin 571

(Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl’s bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third

4. Finance

Rainier Bros. has 12.0% semiannual coupon bonds outstanding that mature in 10 years. Each bond is now eligible to be called at a call price of \$1,060. If the bonds are called, the company must replace them with new 10-year