Question

A callable bond issued by Olmsted, Inc. pays a coupon of 7%, has a par value of $1,000, matures in 20 years, but is callable in 3 years at 110% of par and is currently selling for $1,075. The yield to call on this bond is

Answer 1

The yield to call on this bond is 6.72%.

Step-by-step explanation:

The yield to call on this bond can be calculated using the formula:

Yield to Call = (Annual Interest Payment + (Call Price - Bond Price) / Years to Call) / ((Call Price + Bond Price) / 2)

For this bond, the annual interest payment is $70 (7% of $1000), the call price is $1100, the bond price is $1075, and the years to call is 3. Plugging these values into the formula, we get:

Yield to Call = (70 + (1100 - 1075) / 3) / ((1100 + 1075) / 2) = 0.0672, or 6.72%