Problem: You plan to purchase a bond that was issued on January 1, 2000. It is now January 1, 2005. The bond has an 8% annual coupon rate and a 25-year original maturity. The bond has 5-year call protection until December 31, 2004. After that the bond can be called at 107.5. Interest rates have declined and the bond now sells for 115.5% of par. You must find the YTM and YTC.
1. Calculate the YTM in Year 2005 for the bond. Calculate the YTC.
2. Which return would it earn? Why?
3. Assuming that the bond is being sold at a discount, would the YTM or YTC be more relevant? Why?