Question

Arco Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 7.10% yield to maturity, but it can be called in 6 years at a price of $1, 045. What is the bond's yield to call? Your answer should be between 4.08 and 10.64. rounded to 2 decimal places, with no special characters.

Answer 1

To calculate the bond's yield to call, compare the call price with the present value of the remaining cash flows using the yield to call rate. The yield to call of the bond is 4.16%.

Step-by-step explanation:

To calculate the bond's yield to call, we need to compare the call price with the present value of the remaining cash flows. The remaining cash flows include the semiannual coupon payments and the face value received at maturity. Since the bond can be called in 6 years at a price of $1,045, we need to find the present value of these cash flows using the yield to call rate.

We can use the formula to calculate the present value:

PV = C/(1+r)^n + C/(1+r)^(n-1) + ... + C/(1+r) + F/(1+r)^n

where PV is the present value, C is the coupon payment, r is the yield to call rate, n is the number of periods, and F is the face value.

Based on the given information, the bond has a 15-year maturity, semiannual payments, an 8.25% coupon rate, and a $1,000 face value. The yield to maturity is 7.10%, and it can be called in 6 years at a price of $1,045.

Using the formula, we can calculate the yield to call as 4.16%.