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 maturity of this bond when it is released?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) of a bond is the internal rate of return (IRR) if the bond is held until maturity, assuming that all coupon and principal payments are made as expected. Given that the bond is issued at a price above its face value ($104 per $100 of face value), the YTM will be less than the coupon rate (6%) because the bond is sold at a premium. The correct YTM can be calculated using the bond pricing formula, which takes into account the present value of the bond's future cash flows (coupon payments and the repayment of the principal at maturity or call). Since the bond's price is given and is above par, and knowing that the bond's coupon rate is higher than the YTM when a bond is sold at a premium, the closest and most reasonable answer without doing the exact calculation is 5.47%. This is because the YTM must be lower than the coupon rate due to the premium price but still provide a return that compensates for the risk and time value of money.

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