The 8% McClintock bonds maturing in 10 years are currently trading at 97.55. These bonds are option-free and pay coupons semiannually. Which of the following statements is most likely to be TRUE?
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A. B. C.A
To determine which statement is most likely to be true, let's analyze the information provided.
The McClintock bonds have the following characteristics:
The yield to maturity (YTM) represents the total return an investor would receive if they hold the bond until maturity, considering both the coupon payments and the capital gain/loss from the difference between the purchase price and the face value. YTM takes into account the time value of money, coupon payments, and the price at which the bond is trading in the market.
Option A states that the yield to maturity is greater than 8.0%. Since the coupon rate is 8%, if the bond is trading below its face value (par value), the yield to maturity will be higher than the coupon rate. This is because an investor purchasing the bond at a discount will receive coupon payments plus a capital gain as the bond price increases towards its face value at maturity. The bond is currently trading at 97.55, which is below 100 (par value). Therefore, Option A is most likely to be true.
The current yield is calculated by dividing the annual coupon payment by the current market price of the bond. It represents the return an investor would receive based solely on the coupon payments relative to the bond's price. Since the coupon rate is fixed at 8% and the current market price is 97.55, we can calculate the current yield as follows:
Coupon payment = Coupon rate * Face value Coupon payment = 8% * (100 / 2) (since coupons are paid semiannually) Coupon payment = $4
Current yield = (Annual coupon payment / Current market price) * 100 Current yield = ($4 / $97.55) * 100
Therefore, the current yield is less than 8%. Option B is most likely to be true.
The nominal yield refers to the stated annual coupon rate of the bond, which is 8%. Since the nominal yield is provided as 8%, and there is no additional information to suggest a change in the coupon rate, Option C is not likely to be true.
In summary:
Therefore, the most likely true statement is Option B: The current yield is less than 8.0%.