Question

Bcc has issued 9(3/8) percent debentures that will mature on july 15, year 30. assume that interest is paid and compounded annually. an investor purchased a $1,000 denomination bond for $1,015.00 on july 15, year 1. determine the yield to call if the bonds are called on july 15, year 7, at $1,013.5. round your answer to two decimal places.

Answer 1

The yield to call for the bond is 64.50% over 7 years, including both the interest payments and the capital gain resulting from the purchase of the bond at $1,015.00 and its call at $1,013.50.

Step-by-step explanation:

The yield to call of a bond is an important financial concept that reflects the total earnings an investor can expect to receive from a bond until it is called, accounting for all the interest payments and the difference between the purchase and call prices. This includes the annual coupon payment of 9(3/8) percent on a $1,000 bond, which amounts to $93.75 per year, the purchase price of $1,015.00, and the call price of $1,013.50.

At year 7, the investor would have received a total of 7 years' worth of interest payments ($93.75 × 7 = $656.25) plus the call payment of $1,013.50. To calculate the yield to call, we need to know the total amount received from the bond and the initial investment. Here is the formula:

Yield to Call = (Total Payments Received – Initial Investment) / Initial Investment

Given this formula, and rounding to two decimal places:

Yield to Call = (($656.25 + $1,013.50) – $1,015.00) / $1,015.00

Yield to Call = ($1,669.75 – $1,015.00) / $1,015.00

Yield to Call = $654.75 / $1,015.00

Yield to Call = 0.6450, or 64.50% over 7 years, which is the total yield including both the interest earned and capital gains from the purchase to the call date.