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 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 first opportunity, which is in one year. The bond is priced at $102, and if called, the investor receives $100 plus the $5 coupon, totaling $105. The yield to call is the interest rate that equates the present value of these cash flows to the bond's price. Solving for this gives approximately 2.94%.

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