Currently, Bruner Inc.'s bonds sell for $1,110. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC

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Business

Kaitlynn Garcia

29 December, 14:37

Currently, Bruner Inc.'s bonds sell for $1,110. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC

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Emilee Ewing · Answer 1

0.59%

Explanation:

The yield to maturity can be computed using the rate formula in excel as follows:

=rate (nper, pmt,-pv, fv)

nper is the coupon payments payable by the bond till maturity which is 15

pmt is the coupon paymet of $120

pv is the current market price of $1,110

fv is the face value of $1000

=rate (15,120,-1110,1000) = 10.51%

The yield to call can be computed in a similar, while the only difference the future value would now be call price in 5 years which is $1050 and nper is also 5

=rate (5,120,-1110,1050) = 9.92%

Difference between YTM to YTC=10.65%-9.92%

=0.59%