Question

bonds is selling at $1,132, with 15 years to maturity; it makes an annual coupon payment at 8%. 5 years after the issue, the market interest rate declined and the corporation decided to call the bond at $1,080. The face value of the bond is $1,000. What is the Yield to Call on the bonds

Answer 1

6.26%

Step-by-step explanation:

The yield to call is the rate of return earned by bondholders over the 5-year period before the bonds were called.

It can be determined using excel rate function as well as financial calculator as shown thus:

=rate(nper,pmt,-pv,fv)

nper=the period between bond issuance and the call in years=5

pmt=annual coupon=face value*coupon rate=$1000*8%=80

pv=the initial purchase price=-1132

fv=the price at which the bonds were called after 5 years=1080

=rate(5,80,-1132,1080)=6.26%

Financial calculator:

N=5

PMT=80

PV=-1132

FV=1080

CPT I/Y=6.26%