A company issues a callable (at par) 20-year, 5% 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 $102 per $100 of face value. What is the yield to maturity of this bond when it is released?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) is the interest rate that equates the present value of the bond's future cash flows to its current price. Given the bond's price is above par ($102), the YTM will be lower than the coupon rate of 5%. Calculating the YTM using the bond's price, coupon rate, and maturity, we find it to be approximately 4.84%.

A Company Issues a Callable (At Par) 20-Year, 5% Coupon