Keenan Industries has a bond outstanding with 15 years to maturity,an 8.25% nominal coupon,semiannual payments,and a $1,000 par value.The bond has a 6.50% nominal yield to maturity,but it can be called in 6 years at a price of $1,120.What is the bond's nominal yield to call?

Question

Quizplus · Accepted Answer

To calculate the nominal yield to call, we need to find the yield that equates the present value of the remaining cash flows to the call price of $1,120. We can find the present value of the remaining cash flows by discounting the remaining coupon payments and the principal repayment at the yield to call. Using a financial calculator, we can find that the present value of the remaining cash flows is $1,077.67. The nominal yield to call is the rate that satisfies the equation:
$1,077.67 = $1,120/(1+y/2)^(2*6) + $41.25/(1+y/2)^(2*7) + ... + $41.25/(1+y/2)^(2*15)
Solving for y, we get a nominal yield to call of 6.53%. Therefore, the answer is B.

Keenan Industries Has a Bond Outstanding with 15 Years to Maturity,an