A company issues a 20-year, callable bond at par with 6% annual coupon payments. The bond can be called at par in three years or any time after that on a coupon payment date. The call price is $110 per $100 of face value. What is the yield to call?

Question

Quizplus · Accepted Answer

The yield to call is the interest rate that equates the present value of all expected cash flows from the bond (coupon payments and the call price) to the bond's current price. Since the bond can be called at $110 per $100 of face value, and it pays a 6% annual coupon, the yield to call must account for the higher redemption value compared to the par value. The correct answer, A) 9%, reflects a higher yield to compensate for the bond's potential early redemption at a price above par.

A Company Issues a 20-Year, Callable Bond at Par with 6