A 10% coupon bond,annual payments,10 years to maturity is callable in 3 years at a call price of $1,100.If the bond is selling today for $975,the yield to call is _________.

Question

Quizplus · Accepted Answer

To calculate the yield to call, we must first determine the cash flows.

If the bond is held to maturity, the cash flows will be:

- 10 interest payments of 10% x 1,000 = $100 
- Principal repayment of $1,000

If the bond is called in 3 years, the cash flows will be:

- 3 interest payments of $100 
- Principal repayment of $1,100

To find the yield to call, we can use the financial calculator or trial and error to find the interest rate that makes the present value of these cash flows equal to the bond price of $975.

Using a financial calculator: 
N = 3 
I/Y = 13.98 
PMT = 100 
FV = 1,100 
CPT PV = -975

Therefore, the yield to call is 13.98%.

The best choice is D.

A 10% Coupon Bond,annual Payments,10 Years to Maturity Is Callable