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.)

Difference             2.6168% The YTM is higher

It is convenient to keep the bonds for the moment.

Explanation:

1250 bond market value

90 annual coupon

1000 face value

call value 1050

This will be done using a financial calculator or excel if posible, to achieve faster answers. Using the Internal Rate of Return formula

You will list the return per year and then calculate the IRR in excel.

Same method for the YTM but using the complete life of the bond.

Yield to Maturity 6.8782%

Yield to Call         4.2614%

Difference             2.6168%

Sidenote:

If you want the IRR without excel or financial calculator the process is quite exhausing:

we need to find the rate that equals the 1250 with the cash flow of the bonds:

It is arguably better to use excel or a similar application to find the IRR

answer; drop shippers;

the correct answer is economics is a game without winners or losers.

unlike sports or games economic is a game without losers or winner rather it is a game where everyone wins. parties of business doing businesses exchange money with each other and hence exchange is done on the basis of goods. one party takes the goods and other sales it so there is winner on both sides. each party values more highly the good it gets than the good it gives up. both sides exchange only because both intend to increase their value. so there is no concept of lose or win.