Question

Thatcher Corporation's bonds will mature in 15 years. The bonds have a face value of $1,000 and an 7.5% coupon rate, paid semiannually. The price of the bonds is $900. The bonds are callable in 5 years at a call price of $1,050. Round your answers to two decimal places.
a. What is their yield to maturity?b. What is their yield to call?

Answer 1

Answer:

Using the approximation formulas we can conclude the YTM and YTM respectively are as follow:

YTM 4.2982456%

YTC   5.3846154%

Explanation:

Yield to Call:

$YTC = \frac{C + \frac{F-P}{n }}{\frac{F+P}{2}}$

C= 37.5 (1,000 x 7.5% / 2 payment per year)

F= 1050 future call price

P= 900 market price

n= 10 (5 years x 2 payment per year)

$YTM = \frac{37.5 + \frac{1050-900}{10 }}{\frac{1050+900}{2}}$

quotient 5.3846154%

Yield to maturity:

$YTM = \frac{C + \frac{F-P}{n }}{\frac{F+P}{2}}$

C= 37.5

F= 1000

P= 900

n= 30

$YTM = \frac{C + \frac{1,000 - 900}{30}}{\frac{1.000 + 900}{2}}$

quotient 4.2982456%