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 maturity of this bond when it is released?

Question

Quizplus · Accepted Answer

First, we need to calculate the annual coupon payment. The bond has a face value of $100, so the annual coupon payment is 7% of $100 = $7.

Next, we can use the calculator function to find the yield to maturity, which is the interest rate that makes the present value of the bond's cash flows (coupon payments and face value) equal to its price of $110.

PV = -$110
PMT = $7
FV = $100
N = 5

Using the calculator function, we find that the yield to maturity is 4.71%.

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