Question

Consider the case of Demed Inc.: Demed Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,130.35. However, Demed Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Demed Inc.’s bonds? Value YTM YTC If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Demed Inc.’s bonds? 18 years 13 years 5 years 8 years If Demed Inc. issued new bonds today, what coupon rate must the bonds have to be issued at par?

Answer 1

Answer:

A) YTM = 7.64%

B) YTC = 7.36%

C) 8 years

D )   7.64%

Explanation:

Annual coupon bond rate = 9%

number of year left until maturity = 18

par value of Bonds( FV ) = $1000

current market price( PV ) = $1130.35

Demed can call bonds in 8 years at a call price of $1060

A) what is the Bonds' YTM  ( yield to maturity )

we calculate the interest per period ( PMT )

= ( Fv * Annual coupon bond rate) / number of compounding per year

= (1000 * 9% ) / 1 = $90

next we calculate number of compounding periods till maturity ( NPER )

= number of years to maturity * number of compounding per year

= 18 * 1 =  18

using excel formula = RATE ( NPER,PMT,PV,FV) )

hence yield to maturity = 7.64%

B) what is YTC ( yield to call )

we calculate the interest per period ( PMT )

= $1000 * ( coupon rate / number of compounding per year )

= $1000 * ( 9% / 1 )  = $90

 next we calculate the number of compounding periods till sell

= 8 * 1 = 8

using excel formula = RATE ( NPER,PMT,PV,FV) )

Hence the YTC = 7.36%

C) Bonds will be called at 8 years and this is because the YTC is less than YTM

D )   The coupon rate for the bonds to be issued  at par,  is  7.64%