A 6.5% coupon bond with 12 years left to maturity can be called in 4 years. The call premium is one year of coupon payments. It is offered for sale at $1,190.25. What is the yield to call of the bond? (Assume interest payments are paid semi-annually and par value is $1,000.)

Question

Quizplus · Accepted Answer

To solve for the yield to call:
1. Calculate the present value of the bond at the call date, using the call price as the future value, the remaining coupon payments as cash inflows, and the yield to call as the discount rate.
PV = -1190.25, N = 8 (4 years * 2 semi-annual periods), PMT = 32.5 (6.5% coupon rate * $1000 par / 2 semi-annual periods), FV = 1050 (1000 par + 1 year of coupon payments), solve for I/Y = 2.96%
2. Since the yield to call is higher than the coupon rate, the bond would likely be called in 4 years, resulting in a yield to call of 2.96%.

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