An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 102.0. The bond can be called in 6 years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semi-annually and a par value of $5,000.

Question

Quizplus · Accepted Answer

To calculate the yield to call, we need to find the cash flows for each year and discount them back to the present value at the yield to call rate.

The cash flows for each year are:
Year 1-6: 4% of $5,000 = $200 (semi-annual payments)
Year 7-15: 8% of $5,000 = $400 (semi-annual payments)

The call premium is one year of coupon payments, which is $400.

Using a financial calculator, the yield to call is found to be 8.62%.

To determine if the bond will be called, compare the yield to call with the bond's coupon rate. If the yield to call is less than the coupon rate, it is likely that the bond will be called. In this case, 8.62% is less than the bond's coupon rate of 8%, so the bond is likely to be called.

Therefore, the correct answer is B) 8.62%; yes, the bond will be called.

An 8% Coupon Municipal Bond Has 15 Years Left to Maturity