A company issues a 10-year,callable bond at par with 8% annual coupon payments.The bond can be called at par in one year after issue or any time after that on a coupon payment date.The call price is $105 per $100 of face value.What is the yield to call if this bond is called in one year?

Question

Quizplus · Accepted Answer

If the bond is called in one year, then the investor will receive the coupon payments for that year plus the call price of $105 per $100 of face value. The yield to call is the rate that makes the present value of these cash flows equal to the price of the bond today.

Using a financial calculator or Excel, the yield to call can be calculated as 13%. Therefore, the best choice is B, which corresponds to a yield to call of 13%.

A Company Issues a 10-Year,callable Bond at Par with 8