McCue Inc.'s bonds currently sell for $1,250.They pay a $90 annual coupon,have a 25-year maturity,and a $1,000 par value,but they can be called in 5 years at $1,050.Assume that no costs other than the call premium would be incurred to call and refund the bonds,and also assume that the yield curve is horizontal,with rates expected to remain at current levels on into the future.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM;it is possible to get a negative answer. )

Question

Quizplus · Accepted Answer

To calculate the YTM, we need to find the discount rate that makes the present value of the bond’s cash flows equal to its price. Using a financial calculator, we get a YTM of 6.48%.

To calculate the YTC, we need to assume that the bond is called in 5 years and recalculate the cash flows based on the call price of $1,050. Again, using a financial calculator, we get a YTC of 3.86%.

The difference between the YTM and the YTC is 6.48% - 3.86% = 2.62%, which is option D.

McCue Inc'S Bonds Currently Sell for $1,250