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

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We need to calculate the yield to maturity (YTM), which is the discount rate that equates the present value of the bond's cash flows with its market price. 
We know that the bond has a face value (FV) of $100, a coupon rate (C) of 7%, and annual coupon payments. We also know that the bond can be called (redeemed) at par ($100) in one year or any time after that on a coupon payment date.

To calculate the YTM, we can use a financial calculator or a spreadsheet software such as Excel. The formula for the present value (PV) of the bond is:

PV = C / r + (FV / (1 + r)^n)

where r is the YTM, n is the number of periods (years), and PV is the market price of the bond ($110).

We can start by inputting the known values into the formula and solve for r using trial and error or the Solver tool in Excel. For example, if we assume that the YTM is 5%, we get:

PV = $7 / 0.05 + ($100 / 1.05^5) = $112.68

which is higher than the market price of $110. This means our assumption of 5% is too high, and we need to try a lower value.

Using this method, we can find that the YTM that makes the PV equal to $110 is approximately 4.71%. Therefore, the best choice is C.

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