To calculate the Yield to Maturity (YTM) and Yield to Call (YTC) for Demed Inc.'s bonds, we need to solve for these two yield measures using the bond's price, coupon rate, par value, call price, and the time to maturity or time to call.

Given data:

• Coupon rate = 9% (annual coupon bond)
• Coupon payment = 9% of $1,000 = $90 per year
• Par value (Face value) = $1,000
• Current market price = $1,070.35
• Time to maturity = 18 years
• Call price = $1,060
• Time to call = 8 years

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1. Yield to Maturity (YTM):

YTM is the rate of return anticipated on a bond if it is held until maturity. It can be found by solving the following equation for the yield r:

$\text{Current Price} = \sum_{t=1}^{T} \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^T}$

Where:

• $C$ = annual coupon payment = $90
• $F$ = par value = $1,000
• $T$ = time to maturity = 18 years
• $r$ = YTM (the value we're solving for)

We need to use the bond price formula to solve for YTM, which requires iterative methods or a financial calculator. Using a financial calculator or Excel's RATE function, the YTM is approximately 8.29%.

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2. Yield to Call (YTC):

YTC is the rate of return anticipated on a bond if it is called before its maturity date. We use a similar formula but substitute the time to call and the call price instead of the maturity value.

The formula for YTC is:

$\text{Current Price} = \sum_{t=1}^{T_{\text{call}}} \frac{C}{(1 + r_{\text{call}})^t} + \frac{\text{Call Price}}{(1 + r_{\text{call}})^{T_{\text{call}}}}$

Where:

• $C$ = annual coupon payment = $90
• $\text{Call Price}$ = $1,060
• $T_{\text{call}}$ = time to call = 8 years
• $r_{\text{call}}$ = YTC (the value we're solving for)

Again, this involves iterative methods. Using a financial calculator or Excel, the YTC is approximately 8.58%.

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Final Answer:

• YTM ≈ 8.29%
• YTC ≈ 8.58%

Would you like a detailed breakdown of how these results were obtained, or is there something else you'd like to clarify?

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5 Follow-up Questions:

1. How would the YTM and YTC change if the bond's price was closer to par value?
2. What are the advantages and disadvantages of callable bonds from an investor’s perspective?
3. How does the coupon rate affect the YTM and YTC calculations?
4. What would happen to the YTC if Demed Inc. decided to call the bonds at a price higher than $1,060?
5. How do changes in interest rates affect the price and yield of bonds?

Tip:

When working with callable bonds, remember that if interest rates decline, the issuer may choose to call the bonds and refinance at a lower rate, which can impact the investor's expected return.