A company issues a callable (at par) ten-year, 6% 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 $104 per $100 of face value. What is the yield to maturity of this bond when it is released?

Question

Quizplus · Accepted Answer

To calculate the yield to maturity (YTM), we need to first find the cash flows for the bond.

Assuming a face value of $100:
- Year 1: receive a coupon payment of $6 + return of principal of $100 if bond is not called = $106
- Year 2-10: receive a coupon payment of $6

If the bond is called in year 1, the cash flow would just be $106.

Using a financial calculator, we can solve for the YTM of the bond when it is released at $104 per $100 of face value, with a coupon rate of 6%, coupon payments made annually, and a maturity of 10 years. We enter the cash flows ($-104, $6, $6,...$6, $106) and solve for the IRR (YTM), which is approximately 5.47%.

Therefore, the answer is choice A: 5.47%.

A Company Issues a Callable (At Par) Ten-Year, 6% Coupon