A company issues a callable (at par) five-year, 7% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $110 per $100 of face value. What is the yield to maturity of this bond when it is released?

Question

Quizplus · Accepted Answer

To find the yield to maturity (YTM) of the bond, we need to solve for the discount rate that makes the present value of the bond's future cash flows equal to its price of $110 per $100 face value at issuance. The cash flows for the bond include the annual coupon payments of $7 per $100 face value and the repayment of the face value of $100 at maturity in five years.

Using a financial calculator or spreadsheet, we can solve for the YTM that makes the present value of these cash flows equal to the bond's price:

N = 5
PV = -110
PMT = 7
FV = 100
CPT → I/Y = 4.71%

Therefore, the yield to maturity of the bond when it is released is 4.71%, which is closest to choice D, 4.71%.

A Company Issues a Callable (At Par) Five-Year, 7% Coupon