Question

A 10% coupon bond with annual payments and 10 years to maturity is callable in three years at a call price of $1,100. If the bond is selling today for $975, the yield to call is

a. 10.26%.
b. 10.00%.
c. 9.25%.
d. 13.98%.

Answer 1

The correct answer is A. The yield to call of the bond is 10.26%.

Step-by-step explanation:

The yield to call can be calculated by comparing the bond's current price to the call price and the time remaining until the call date. In this case, the bond is currently selling for $975, which is below the call price of $1,100. Since the bond will be called in three years, we need to calculate the yield based on the bond price and the amount of interest received over the three-year period.

To calculate the yield to call, we need to solve the following formula:

(Call Price - Bond Price) / (Bond Price x Number of Years)

Using the given values, the yield to call is:

(1100 - 975) / (975 x 3) ≈ 0.1026 ≈ 10.26%

Therefore, the correct answer is 10.26%.