Benik Properties' bonds mature in 14 years. The bonds have an 8 percent semiannual coupon and a par value of $1,000. The bonds are callable in five years at a call price of $1,050. The price of the bonds today is $1,075. Assuming that interest rates remain at the same level they are today, what yield can investors expect to earn on these bonds?

Question

Quizplus · Accepted Answer

The yield that investors can expect to earn on these bonds is the yield to call (YTC) if the bonds are callable in five years and the current price is above the call price. The YTC is calculated based on the assumption that the bonds will be called at the earliest call date because it is financially advantageous for the issuer to do so when the market price is higher than the call price. Given the information, the correct yield cannot be precisely calculated without using the bond valuation formula or a financial calculator, but among the provided options, 7.05% is chosen as a plausible estimate for the yield to call, considering the bond's price, call price, and coupon rate.

Benik Properties' Bonds Mature in 14 Years