Sadik Inc.'s bonds currently sell for $1,250 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC)?

Question

Quizplus · Accepted Answer

To calculate yield to call (YTC), we need to use the following formula:

YTC = (Annual interest + [(Call price - Market price) / Years until call]) / [(Call price + Market price) / 2]

Plugging in the given values:

Annual interest = $105
Call price = $1,100
Market price = $1,250
Years until call = 5

YTC = ($105 + [($1,100 - $1,250) / 5]) / [($1,100 + $1,250) / 2]
YTC = ($105 - $30) / $1,175
YTC = 0.06 or 6%

Therefore, the yield to call (YTC) is 6%, which is closest to choice B (6.28%).

Sadik Inc'S Bonds Currently Sell for $1,250 and Have a Par