A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $104 per $100 of face value.What is the yield to call of this bond when it is released?

Question

Quizplus · Accepted Answer

To calculate the yield to call, we need to find out the cash flow if the bond is called after one year. 
If the bond is called after one year, the company will have to pay the face value of $100 and will not have to pay any more coupons. So, the cash flow will be:
CF= 100 (call price)
PV = 104 (release price)
n = 1
i = yield to call

Using the formula: PV = CF / (1+i)^n, we can solve for i, which is the yield to call. 
104 = 100 / (1+i)^1
1+i= 100/104
i= 1.923%
Therefore, the yield to call of the bond is 1.92% per annum, so the best choice is C.

A Company Issues a Callable (At Par)ten-Year,6% Coupon Bond with Annual