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Homework answers / question archive / Below is information about various bonds as of November 6, 2020, retrieved from www
Below is information about various bonds as of November 6, 2020, retrieved from www.schwab.com. The par value of the bonds is $1,000.
Issuer Name; Coupon; Years to Maturity; Price; Yield to Maturity (%) ; Semi-annual?
Clorox 1.80% 19.50 $1,099.54 Yes
Ford 4.05% 5.13 4.150% Yes
Use the information above to complete the table below. Then answer the 7 questions that follow.
Note: YTM = Yield to Maturity; CY = Current Yield; CGY = Capital Gains Yield
What is the yield to maturity for Clorox bonds?
What is the current yield for Clorox bonds?
What is the capital gains yield for Clorox bonds?
What is the price of Ford bonds?
What is the current yield for Ford bonds?
What is the capital gains yield for Ford bonds?
Clorox bonds can be called in 4.5 years and have a call value of $1,060. (Refer to the data above to make this calculation.) What is the yield to call? Are the bonds likely to be called?
We can calculate the yield to maturity for Clorox bonds by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to maturity (semiannual)
Nper = 19.50*2 = 39 periods (semiannual)
Pmt = Coupon payment = $1,000*1.80%/2 = $9
PV = $1,099.54
FV = $1,000
Substituting the values in formula:
= rate(39,9,-1099.54,1000)
= 0.61%
Yield to maturity = Rate * 2
= 0.61% * 2
= 1.22%
Computation of the current yield for Clorox bonds:-
Current yield = Annual coupon payment / Current price of the bond
= $1,000*1.80% / $1,099.54
= 1.64%
Computation of the capital gains yield for Clorox bonds:-
Capital gains yield = YTM - Current yield
= 1.22% - 1.64%
= -0.41%
We can calculate the price for Ford bonds by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price for Ford bonds
Rate = 4.150%/2 = 2.075% (semiannual)
Nper = 5.13*2 = 10.26 periods (semiannual)
Pmt = Coupon payment = $1,000*4.05%/2 = $20.25
FV = $1,000
Substituting the values in formula:
= -pv(2.075%,10.26,20.25,1000)
= $995.42
Computation of the current yield for Ford bonds:-
Current yield = Annual coupon payment / Price of the bond
= $1,000*4.05% / $995.42
= 4.07%
Computation of the capital gains yield for Ford bonds:-
Capital gains yield = YTM - Current yield
= 4.150% - 4.07%
= 0.08%
We can calculate the yield to call for Clorox bonds by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to call (semiannual)
Nper = 4.5*2 = 9 periods (semiannual)
Pmt = Coupon payment = $1,000*1.80%/2 = $9
PV = $1,099.54
FV = Call value = $1,060
Substituting the values in formula:
= rate(9,9,-1099.54,1060)
= 0.43%
Yield to call = Rate * 2
= 0.43% * 2
= 0.85%
Yes, the bonds are likely to be called.
