Hallmark's Furniture Outlet is issuing 15-year, 7.5% callable bonds. These bonds are callable in 5 years with a call premium of $37.50. The bonds are being issued at par and pay interest semiannually. What is the yield to call?

Question

Quizplus · Accepted Answer

To calculate yield to call, we need to use the following formula:

Yield to Call = (Annual interest payment + ((Par value - Call price) / Remaining years until call date)) / ((Par value + Call price) / 2)

Annual interest payment = Par value x coupon rate = $1,000 x 7.5% = $75

Remaining years until call date = 5 years (since bonds are callable in 5 years)

Plugging in the values, we get:

Yield to Call = ($75 + (($1,000 - $37.50) / 5)) / (($1,000 + $37.50) / 2) = 8.12%

Therefore, the answer is B.

Hallmark's Furniture Outlet Is Issuing 15-Year, 7