A company issues a callable (at par)five-year,7% 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 $110 per $100 of face value.What is the yield to call of this bond when it is released?

Question

Quizplus · Accepted Answer

To find the yield to call, we need to calculate the rate at which the present value of the bond's cash flows equals its current price.

Using a financial calculator or spreadsheet, we can input the following information:
N = 4 (since the bond can be called in year 2)
I/Y = ?
PV = -110 (negative because it represents a cash outflow)
PMT = 7 (the annual coupon payment)
FV = 100 (the face value)

After solving for I/Y, we get a yield to call of 2.73%. Therefore, the correct answer is B.

A Company Issues a Callable (At Par)five-Year,7% Coupon Bond with Annual