Question

Suppose that a 10% 15-year bond has the following call structure:

not callable for the next 5 years
first callable in 5 years at $105
first par call date is in 10 years
The price of the bond is $127.5880.

Is the yield to maturity for this bond 7.0%, 7.4%, or 7.8%?

Answer 1

The yield to maturity for this bond is approximately 7.4%. The correct answer is option 2.

Step-by-step explanation:

The yield to maturity (YTM) for a bond is the total return an investor can expect to receive if the bond is held until it matures. To calculate the YTM, we need to determine the internal rate of return (IRR) of the bond's cash flows. In this case, the bond has a call structure, which means it can be called or redeemed by the issuer before its maturity date. The YTM will be the rate that makes the present value of the bond's cash flows equal to its current market price.

Given the information provided, we know that the bond is currently priced at $127.5880. We also know that the bond has a 10% coupon rate and a 15-year maturity, with the first call option available in 5 years at $105, and the first par call date in 10 years.

To calculate the YTM, we can use financial calculators or software, such as Microsoft Excel or online bond calculators. Plugging in the relevant information, the YTM for this bond is approximately 7.4%.