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

The yield to call is calculated based on the bond being called at the first opportunity, which is after one year. The bond pays a 7% coupon, but since it is priced at $110, the yield to call is lower than the coupon rate. The yield to call is calculated as the interest payment ($7) minus the loss on the bond ($10) divided by the price ($110), which results in approximately 2.73%.

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