It is now January 1, 2012, and you are considering the purchase of the outstanding bond which was issued on January 1, 2010. It has a 9.5% annual coupon and had a 20 year original maturity. (It matures on December 31, 2029.) There is 5 years of call protection (until December 31, 2014), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 120.075% of par, or $1,200.75.
Question1. What is the yield to maturity?
Question2. What is the yield to call?
Question3. If you bought this bond, which return would you actually earn? Describe your reasoning.
i) Investors would not expect the bonds to be called and to earn the YTM since the YTM is less than the YTC.
ii) Investors would expect the bonds to be called and to earn the YTC since the YTC is less than the YTM.
iii) Investors would expect the bonds to be called and to earn the YTC since the YTM is less than the YTC.
iv) Investors would expect the bonds to be called and to earn the YTC since the YTC is greater than the YTM.
v) Investors would not expect the bonds to be called and to earn the YTM since the YTM is greater than the YTC.