Question

Highfield Inc's bonds currently sell for $1,275 and have a par value of $1,000. . They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to call (YTC)?

A. 7.00%
B. 7.13%
C. 7.28%
D. 7.31%
E. 7.42%

Answer 1

To calculate the yield to call (YTC), use the formula (Annual interest payment + (Call price - Current price) / Years until call date) / ((Call price + Current price) / 2). Plugging in the values, the YTC is approximately 8.1%.

Step-by-step explanation:

To calculate the yield to call (YTC) of Highfield Inc's bonds, we need to find the annual interest payment and the number of years remaining until the call date. The annual interest payment is $120, and the number of years remaining until the call date is 5. You can use the following formula to calculate the YTC:

YTC = (Annual interest payment + (Call price - Current price) / Years until call date) / ((Call price + Current price) / 2)

Plugging in the values:

YTC = (120 + (1120 - 1275) / 5) / ((1120 + 1275) / 2)

YTC = (120 + (-155) / 5) / ((1120 + 1275) / 2)

YTC = (120 - 31) / (2195 / 2)

YTC = 89 / 1,097.5

YTC ≈ 0.081

Converting the decimal to a percentage, the yield to call (YTC) is approximately 8.1%.