A fifteen-year, 7% semi-annual-pay coupon bond that is callable in five years at a call price of $1,070 is currently selling for $1,036.53.What is the yield-to-call (YTC)of this bond?

Question

Quizplus · Accepted Answer

The yield-to-call (YTC) can be calculated considering the bond's price, the call price, the time until call, and the coupon payment. The YTC is the interest rate that equates the present value of all future cash flows (coupon payments until the call date and the call price) to the bond's current price. Given the bond's semi-annual coupon payments, the calculation involves finding the rate that satisfies this equation for a semi-annual period, which is then annualized. The correct YTC in this scenario is 7.30%, indicating that if the bond is called in five years, the investor would earn an annualized return of 7.30% on their investment.

A Fifteen-Year, 7% Semi-Annual-Pay Coupon Bond That Is Callable in Five