Question

You have just purchased an outstanding 15-year bond with a par value of $1,000 for $1.145.68. Its annual coupon payment is $75. The VTM of this bond is 6%. Now, assume that this bond is callable in 7 years at a price of $1,075. What is the bond's YTC?

a) 7.5%
b) None of these are correct
c) 6%
d) 5.81%
e) 4.95%

Answer 1

The bond's yield to call (YTC) is 7.5%.

Step-by-step explanation:

The yield to call (YTC) of a bond is the rate of return anticipated by an investor holding the bond until it is called by the issuer. To calculate the YTC, we need to compare the present value of the bond's cash flows to its market price. In this case, the bond's market price is $1,145.68, and it has a call price of $1,075 in 7 years. The bond has a par value of $1,000 and an annual coupon payment of $75. By discounting the bond's cash flows to the present value, we find that the bond's YTC is 7.5%.