Problem - Yield to Call

Six years ago the Singleton Company issued 20 year bonds with a 14% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Singleton called the bonds, Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Explain why the investor should or should not be happy that Singleton called them.

Yield to Maturity and Yield to Call

Kaufman Enterprise 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 $1,175. 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 6m they may be called at 108% of face value; in year 7, they maybe 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 night expect the firm to call the bonds?