Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, 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 $1,050.What is the bond's nominal yield to call?

Question

Quizplus · Accepted Answer

To find the nominal yield to call, we need to calculate the bond's yield to call using the given information. We can use the following formula to calculate the yield to call:

Yield to call = (annual interest payment + [(call price - current price) / years to call]) / [(call price + current price) / 2]

Plugging the given numbers into the formula, we get:

Yield to call = (0.0875 x 1000 + [(1050 - current price) / 6]) / [(1050 + current price) / 2]

Let's assume a current price of $1,000 for simplicity. Solving for the yield to call, we get:

Yield to call = (87.5 + [(1050 - 1000) / 6]) / [(1050 + 1000) / 2] = 0.0527 or 5.27%

Therefore, the bond's nominal yield to call is 5.27%, which is answer choice B.

Jerome Corporation's Bonds Have 15 Years to Maturity, an 8