Question

Qwe wishes to issue a perpetual callable bond (par value = $1,000) that pays 7.6% annual coupon. The current interest rate is 8.2%. What is the yield to call on this bond?

1) 7.6%
2) 8.2%
3) Cannot be determined
4) Not enough information provided

Answer 1

The yield to call on the perpetual callable bond cannot be determined with the information provided as the call price and time until call are not specified. If the bond is callable at par, the yield to call would match the coupon rate of 7.6%.

Step-by-step explanation:

The yield to call on a perpetual callable bond when the current interest rate is higher than the coupon rate cannot be directly determined from the information provided. This is because the exact price at which the bond can be called (redeemed before maturity by the issuer) is not specified. For calculating yield to call, we need the call price, years to call, and the coupon payments up to the call date, none of which are given in the question.

If the bond were to be called at par value ($1,000), the yield to call would simply be the coupon rate, which is 7.6%. However, if the bond is callable at a price different from the par value, we would need that price to calculate the yield. Generally, when the interest rates increase, the value of existing bonds falls below par value, and if interest rates decrease, the value of the bond might be above par value. The question does not provide enough details to determine the yield to call accurately.