Question

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,045. What is the bond’s nominal yield to call?

a.
6.77%

b.
4.42%

c.
5.54%

d.
5.59%

e.
5.09%

Answer 1

The bond’s nominal yield to call is 9%.

Step-by-step explanation:

To find bond’s nominal yield to call we have to calculate IRR of this investment. For IRR we need to calculate NPV using two differerent discount rate (5% and 10%). Detail calculation is given below.

NPV at 5%

NPV = (-1,000 * 1) + (1,045 * 0.746) + (82.5 * 5.077) = $198.4

NPV at 10%

NPV = (-1,000 * 1) + (1,045 * 0.565) + (82.5 * 4.355) = ($ 50.3)

Now calculating IRR

IRR = 5% + 198.4/(198.4+50.4) * (10%-5%) = 9%