A 12% coupon bond,semiannual payments,is callable in 5 years.The call price is $1,120;if the bond is selling today for $1,110,what is the yield to call?

Question

Quizplus · Accepted Answer

To solve the problem, we need to use the bond pricing formula:

P = (C/(1+r/2)^n) + (C/(1+r/2)^(n-1)) + ... + (C/(1+r/2)^1) + (M/(1+r/2)^n)

where
P = price of the bond
C = coupon payment
r = yield to call
n = number of periods until call

Since the bond is selling for $1,110 and has a $1,120 call price, the issuer is likely to call the bond. Therefore, we can assume that the bond will be called in 5 years. Using a financial calculator or Excel, we can solve for the yield to call:

N = 10 (semiannual payments for 5 years)
I/Y = ?
PV = -1,110
PMT = 60 (12% coupon rate divided by 2 semiannual periods)
FV = 1,120

Solving for I/Y, we get 10.95%. Therefore, the yield to call is 10.95%, which is closest to answer choice C.

A 12% Coupon Bond,semiannual Payments,is Callable in 5 Years