A company issues a callable (at par)10-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 scheduled. In this case, the bond is issued at a premium (price higher than the face value) because its coupon rate (6%) is higher than the prevailing market interest rates. To calculate the YTM, we would need to solve for the discount rate that equates the present value of all future cash flows (coupon payments and the repayment of the principal at maturity) to the bond's current price ($104). Given the information provided, the correct YTM cannot be calculated without performing the actual calculation using the bond's cash flows and solving for the discount rate that equates the present value of these cash flows to the bond's price. However, since the bond is issued at a premium, we know the YTM will be less than the coupon rate (6%). Among the given options, 5.47% is the only rate less than 6% and plausible given the bond's premium price, indicating it is the correct choice based on the information provided and the understanding of bond pricing principles.

A Company Issues a Callable (At Par)10-Year, 6% Coupon Bond