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 call of this bond when it is released?

Question

Quizplus · Accepted Answer

The yield to call is calculated based on the bond being called at the earliest possible date, which is one year after release. The bond is priced at $110, and if called at par ($100), the investor would incur a loss. The yield to call accounts for this loss and the coupon payment, resulting in a lower yield than the coupon rate.

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