Gilligan Co.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, and are callable in 6 years at $1,067.50. 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. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM

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Business

Ruffe

15 August, 13:42

Gilligan Co.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, and are callable in 6 years at $1,067.50. 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. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM

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Rylee Cobb · Answer 1

YTM = 5.35%

YTC = 5.44%

Explanation:

the YTM = {coupon + [ (face value - market value) / n]} / [ (face value + market value) / 2]

YTM = {67.5 + [ (1,000 - 1,150) / 15]} / [ (1,000 + 1,150) / 2] = 57.5 / 1,075 = 5.35%

the YTC = {coupon + [ (face value - call value) / n]} / [ (face value + call value) / 2]

YTC = {67.5 + [ (1,000 - 1,067.5) / 6]} / [ (1,000 + 1,067.5) / 2] = 56.25 / 1,033.75 = 5.44%