It is now January 1, 2018, and you are considering the purchase of anoutstanding bond that was issued on January 1, 2016. It has an 8% annual coupon and hada 30-year original maturity. (It matures on December 31, 2045.) There is 5 years of call protection(until December 31, 2020), after which time it can be called at 108—that is, at 108%of par, or $1,080. Interest rates have declined since it was issued, and it is now selling at119.12% of par, or $1,191.20.a. What is the yield to maturity? What is the yield to call?b. If you bought this bond, which return would you actually earn? Explain your reasoning.c. Suppose the bond had been selling at a discount rather than a premium. Would theyield to maturity have been the most likely return, or would the yield to call havebeen most likely?
It is now January 1, 2018, and you are considering the purchase of an
outstanding bond that was issued on January 1, 2016. It has an 8% annual coupon and had
a 30-year original maturity. (It matures on December 31, 2045.) There is 5 years of call protection
(until December 31, 2020), after which time it can be called at 108—that is, at 108%
of par, or $1,080. Interest rates have declined since it was issued, and it is now selling at
119.12% of par, or $1,191.20.
a. What is the yield to maturity? What is the yield to call?
b. If you bought this bond, which return would you actually earn? Explain your reasoning.
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?
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