Final answer:
The yield to call (YTC) is determined by finding the discount rate that equates the present value of all cash flows until the call date with the bond's current market price. It accounts for the expected semiannual coupon payments and the call price of the bond. The calculation is typically achieved through financial calculators or software.
Step-by-step explanation:
The calculation of yield to call (YTC) for a bond involves finding the rate of return assuming the bond will be called at the first opportunity by the issuer. We calculate the yield to call by equating the present value of all future cash flows (coupons and call price) until the call date to the current market price of the bond.To perform this calculation, we consider semiannual coupon payments, the call price, and the number of periods until the call. Since the bond pays a 9.0% annual coupon rate semiannually, the semiannual coupon payment is 4.5% of the face value. There will be 12 payments until the call date six years from now.
The call price is $1,150 and the current market price is the present value we aim to match. The yield to call is found using a financial calculator or software, by setting the future value to the call price, the payment to the semiannual coupon payment, and solving for the rate (YTC) that matches the current price of the bond as the present value.In brief, the formula for finding YTC is: Present Value = Summation over all periods until call (Coupon Payment / (1+YTC)^(Period)) + Call Price / (1+YTC)^(Number of Periods until Call). This equation is solved iteratively to find the YTC. However, without the actual calculation steps or a financial calculator handy, we cannot provide the direct YTC value.