Kempton Enterprises has bonds outstandingwith a $1,000 face value and 10 years left until maturity. They have an 11% annual couponpayment, and their current price is $1,185. The bonds may be called in 5 years at 109% offace value (Call price = $1,090).a. What is the yield to maturity?b. What is the yield to call if they are called in 5 years?c. Which yield might investors expect to earn on these bonds? Why?d. The bond’s indenture indicates that the call provision gives the firm the right to callthe bonds at the end of each year beginning in Year 5. In Year 5, the bonds may becalled at 109% of face value, but in each of the next 4 years, the call percentage willdecline by 1%. Thus, in Year 6, they may be called at 108% of face value; in Year 7,they may be called at 107% of face value; and so forth. If the yield curve is horizontaland interest rates remain at their current level, when is the latest that investors mightexpect the firm to call the bonds?
Kempton Enterprises has bonds outstanding
with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon
payment, and their current price is $1,185. The bonds may be called in 5 years at 109% of
face value (Call price = $1,090).
a. What is the yield to maturity?
b. What is the yield to call if they are called in 5 years?
c. Which yield might investors expect to earn on these bonds? Why?
d. The bond’s indenture indicates that the call provision gives the firm the right to call
the bonds at the end of each year beginning in Year 5. In Year 5, the bonds may be
called at 109% of face value, but in each of the next 4 years, the call percentage will
decline by 1%. Thus, in Year 6, they may be called at 108% of face value; in Year 7,
they may be called at 107% of face value; and so forth. If the yield curve is horizontal
and interest rates remain at their current level, when is the latest that investors might
expect the firm to call the bonds?
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