A 6.75 percent coupon bond with 13 years left to maturity can be called in two years. The call premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to call of the bond? Assume interest payments are paid semiannually and par value is $1,000.

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Quizplus · Accepted Answer

The yield to call (YTC) is calculated by considering the bond's call price, which is the par value plus the call premium (one year of coupon payments). The semiannual coupon payment is $33.75 ($67.50 annually), and the call price is $1,067.50. Using the bond's current price of $919.75, the YTC is calculated over the 4 semiannual periods until the call date. Solving for YTC gives approximately 7.27% per semiannual period, or 14.54% annually.

A 675 Percent Coupon Bond with 13 Years Left to Maturity