Question

lourdes corporation's 11% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 15 years, are callable 4 years from today at $1,050. they sell at a price of $1,190.03, and the yield curve is flat. assume that interest rates are expected to remain at their current level. what is the best estimate of these bonds' remaining life? round your answer to the nearest whole number.

Answer 1

The remaining life of the bond is 4 years and the YTM is 8.70%

Par value of the bond = $1000

In a bond, the owner of the bond loans money to a business or the government. Up to a certain future date, when they return the principal amount of the loan, the borrower pays recurring interest payments.

The total sum that the bond issuer returns to the bondholder is known as the "principal," and the interest is represented by a series of payments known as the "coupon."

Selling price = $1190.03

Callable price = $1050

N = 15 years

Interest rate = 11%

Semi payment = Interest rate*Par value*Time in years

= 11%*1000*0.5 = $55

Since those bonds are expected to be called in 4 years, the remaining life of the bond is 4 years

Calculating the yield to maturity:

Future value (FV) = 1000

Present value (PV) = -1190.03

N = 15*2 = 30

PMT = $55

Yield to maturity = [Annual Interest + {(FV-Price)/Maturity}] / [(FV+Price)/2]

= {0.11 + {1000 - 1190.03}/1050}/{(1000 + 1190.03)/2}

So, Yield to maturity = 8.70%

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