A 10% coupon bond with annual payments and 10 years to maturity is callable in three years at a call price of $1,100.If the bond is selling today for $975, the yield to call is

Question

Quizplus · Accepted Answer

To calculate the yield to call, we need to find the rate of return that will make the present value of the bond's remaining cash flows equal to its current price ($975). We use the following formula:

PV = C/(1+r) + C/(1+r)^2 + ... + C/(1+r)^n + (Par value)/(1+r)^n

Where: 
PV = Present value of the bond 
C = Annual coupon payment 
r = Yield to call 
n = Number of years until call date

If we assume a yield to call of 13.98%, we can calculate the present value of the bond's remaining cash flows:

PV = ($100/(1+0.1398)^1) + ($100/(1+0.1398)^2) + ... + ($1,000/(1+0.1398)^10) + ($1,100/(1+0.1398)^3) 
PV = $974.96

Since the calculated present value is very close to the bond's current price of $975, we can conclude that the yield to call is approximately 13.98%. Therefore, the correct answer is D.

A 10% Coupon Bond with Annual Payments and 10 Years