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
[tex]\left[\begin{array}{cc}$Period&$Return\\0&-1,250\\1&90\\2&90\\3&90\\4&90\\5&90+1050=1,140\end{array}\right][/tex]
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:
[tex]1,250 = \frac{90}{1+IRR} +\frac{90}{(1+IRR)^{2}} + \frac{90}{(1+IRR)^{3}} + \frac{90}{(1+IRR)^{4}} + + \frac{90+1050}{(1+IRR)^{5}}[/tex]
It is arguably better to use excel or a similar application to find the IRR
