Question

GYAO Inc.'s bonds currently sell for $1,275. They pay a $80 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,080. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)

Answer 1

Answer: 2.46%

Step-by-step explanation:

To solve this, we need to know the yield to call which will be:

FV = Call price = -$1,080.00

PV = Bond price = $1,275.00

PMT = Coupon = -$80.00

N = 5

Using financial maturity, the yield to call will be:

= Rate(5,80,-1275,1000) = 3.42%

The yield to maturity will be:

FV = Face value = -$1,000.00

PV = Bond price = $1,275.00

PMT = -$80.00

N = 25

Using the financial calculator

Yield to maturity = Rate(25,80,-1275,1000) = 5.87%

The difference between the yield to call and the yield to maturity will then be:

= 3.42% - 5.87%

= -2.46%