Question

A 30-year maturity, 8% coupon bond paying coupons semiannually is callable in five years at a call price of $1,100. The bond currently sells at a yield to maturity of 7% and has a par value of $1,000. What is its yield to call

Answer 1

6.74%

Step-by-step explanation:

The computation of the yield to call is as followS;

But before that the present value is

Given that

PMT = $1,000 × 8% ÷ 2 = $40

NPER = 30 × 2 = 60

RATE = 7% ÷ 2 = 3.50

FV = $1,000

The formula is shown below:

= -PV(RATE, NPER, PMT, FV,TYPE)

After applying the above formula, the present value is $1,124.72

Now the yield to call is

Given that

PMT = $1,000 × 8% ÷ 2 = $40

NPER = 5 × 2 = 10

PV = $1,124.72

FV = $1,100

The formula is given below:

= RATE(NPER,PMT,-PV,FV,TYPE)

After applying the above formula, the yield to call is

= 3.37% × 2

= 6.74%