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Monday, 13 April 2015

INVESTMENT ANALYSIS – YIELD TO CALL




For comments, observations, questions and answers, email; theotherwomaninmarriage@gmail.com 

Like I said, this is exam question.  So, pay keen attention to the formula and workings – there is nothing wrong with you cramming formulas and steps. Honestly, the examiners will not penalize you for cramming formulas and steps. Once the answer sheet is shared, write down all the formulas you have crammed at the end of your answer sheet. Then you can strike it off later after you have finish with the paper.

THE QUESTION:
The Other Woman In Marriage Corporation has a 12 PERCENT Semi-Annual Bond issue with F=N1,000 that matures in 15 years but is called in 6 YEARS at N1,200.  If the CURRENT PRICE OF BOND is N900, determine the YIELD – TO – CALL.

Note: You need a calculator, pen and paper by your side to ascertain how I got the answer below:

SOLUTION:
Given that i=12%
Number of years to maturity = 15 years
Number of years to first call date = 6 years
Current Price of Bond = N900
Call Price of the Bond = N1,200

To determine the Yield – To – Call, here is the formula:

YTC = Annual Coupon Payment + (Call Price – Market Price)
                                                          Number of Years To Call Date
                                                       ½ (Call Price + Market Price)

Pls, take note of the above long line and the short one.  It demarcates our working/calculations.

YTC = 120 + (1,200 – 900)
                                6­­­­­_____
              ½ (1,200 + 900)


Before we continue, let me do a little explanation here: YTC = 120.  I got the 120 from i, which is 12% multiply by Face Value which is N1,000.  The Face Value was shorten to F in the question.

N1,200 is the Call Price of the Bond which I have explained before and it is in the question.  You must read the question very well to understand how the figures are picked. 
N900 is the Current Price of the Bond.  6 is the Number of Years to First Call Date.  ½ is constant in the formula.  While (1,200+900) is still the same figures of the Call Price of the Bond and Current Price of Bond.

Now let’s ride on from where we stop.

YTC = 120+50 = 170 = 0.1619 = 16.19%

The Yield-To-Call is 16.19%.

CLARIFICATION: - You know how I got 120 right? If you don’t have explained that above.  The 50 is gotten from 1,200 – 900 = 300.  300/6=50.  Remember, I said you should pay attention to one long line below in the formula, that means answer gotten above will be divided by the answer below that long line.  So now we have at the top 120+50.

But we are yet to explain the ½ (1,200 +900).  When You add 1200+900, it gives you 2,100.  Now divide ½ x 2,100 you will have 1,050.  That is how we got;

 120 + 50 =   170 
1,050           1,050

170
1,050   will give you 0.1619.  Then convert it to percentage by doing this 0.1619 x 100 = 16.19%.  That is it - Simple huh?

NOTE:
Check out the book “The Other Woman In Marriage” at www.okadabooks.com.  Also, don’t forget to search the blog archive by your left hand side for past different topics treated.


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