At the beginning of 2014, ABC Corp. issued (sold) $50 million in 20-year callable bonds at par value of $1,000 paying an 8% annual coupon rate that is paid semiannually. The bonds are callable after 5 years for a call premium equal to one annual coupon payment. During 2014, interest rates dropped significantly and ABCs bonds are now trading for $1,130.25.
a. What is the amount of the semiannual payment received (PMT) from investing in this bond?
b. What is the new yield to maturity (YTM) of the bonds at the beginning of 2015?
c. What is the new yield to call (YTC) at the beginning of 2015?
d. Should investors expect to receive YTC or YTM?
e. How much will the firm save or lose each year in interest if the existing bonds are called and reissued? You may ignore any costs involved in calling/re-issuing the bonds.