Math Problem Statement

Thatcher Corporation's bonds will mature in 18 years. The bonds have a face value of $1,000 and an 8.5% coupon rate, paid semiannually. The price of the bonds is $950. The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity? What is their yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

Solution

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Math Problem Analysis

Mathematical Concepts

Bond Pricing
Yield to Maturity (YTM)
Yield to Call (YTC)
Time Value of Money

Formulas

P = ∑(C / (1 + r/2)^t) + (FV / (1 + r/2)^N)
YTM = internal rate of return (IRR) equating bond price to present value of future cash flows
YTC = IRR using call price instead of face value and periods until call date

Theorems

Present Value Theorem
Internal Rate of Return (IRR) Theorem

Suitable Grade Level

College Level (Finance/Investment)