A 12% coupon bond,semiannual payments,is callable in 5 years.The call price is $1,120; if the bond is selling today for $1,110,what is the yield to call?

Question

Quizplus · Accepted Answer

To calculate the yield to call, we need to use the formula:

YTC = (Annual interest payment + Call premium - Price of the bond) / ((Call price + Price of the bond) / 2)

First, let's calculate the annual interest payment:

Annual interest payment = Coupon rate * Face value
Annual interest payment = 12% * $1,000
Annual interest payment = $120

Next, let's plug in the values we have:

YTC = ($120 + $1,120 - $1,110) / (($1,120 + $1,110) / 2)
YTC = $130 / $1,115
YTC = 0.11628 or 11.628%

Since the bond is callable, the yield to call is the relevant yield to use. Therefore, the answer is (C) 10.95%.

A 12% Coupon Bond,semiannual Payments,is Callable in 5 Years