Castle's Furniture Outlet is issuing 20-year, 8% callable bonds. These bonds are callable in 5 years with a call premium of $40. The bonds are being issued at par and pay interest semiannually. What is the yield to call?

Question

Quizplus · Accepted Answer

To calculate the yield to call, we need to find the present value of the bond's cash flows with respect to the call date. 
- If the bond is not called, we would receive $40 every 6 months for the next 20 years, and the principal of $1,000 at the end of 20 years. 
- If the bond is called in 5 years, we would receive $1,040 (the call price of $1,000 plus the call premium of $40) and no further payments. 
Using a financial calculator or Excel function, we can find that the yield to call is 8.66%. Therefore, the best choice is B.

Castle's Furniture Outlet Is Issuing 20-Year, 8% Callable Bonds