Question

You are considering purchasing a bond with 18 years to maturity, a $1,000 face value and a 5% coupon rate with interest paid semiannually. Interest rates on bonds in this risk class have dropped to 3% and you expect that this bond will be called in 3 years. The current price of the bond is $1,075.00. Assuming you would be paid one year's worth of interest as a premium if the bond is called, what is the yield to call on this bond?

a. 5.43%.
b. 3.91%.
c. 0 2.93%.
d. 1.86%.

Answer 1

b. 3.91%.

Step-by-step explanation:

The computation of the yield to call is given below

Given that

NPER = 3× 2 = 6

PMT = $1,000 × 5% ×1 ÷2 = $25

PV = $1,075

FV = $1,000 + $50 = $1,050

The formula is given below:

=RATE(NPER,PMT,-PV,FV,TYPE)

After applying the above formula, the yield to call is

= 1.9565% × 2

= 3.91%