Question

Atlantis Fisheries issues zero coupon bonds on the market at a price of $498 per bond. These are callable in 8 years at a call price of $600. Using semiannual compounding, what is the yield to call for these bonds

Answer 1

Answer: 2.34%

Step-by-step explanation:

Yield to call is the rate that would make the issue price equal to the call price in future. It is therefore the rate that would compound the $498 to $600 in 8 years.

Semiannual compounding means that the interest rate and the number of periods need to be adjusted:

Number of periods = 8 * 2 = 16 semi annual periods

Interest = x / 2 = 0.5x

Call price = Issue price * ( 1 + rate) ^ number of periods

600 = 498 * (1 + 0.5x)¹⁶

(1 + 0.5x)¹⁶ = 600 / 498

0.5x = ¹⁶√ (600/498) - 1

x = 0.011713672618214 / 0.5

x = 2.34%