Question

A 20-year maturity, 9% coupon bond paying coupons semiannually is callable in five years at a call price of $1,050. The bond currently sells at a yield to maturity of 8% (4% per half-year). a. What is the yield to call annually? (D

Answer 1

The yield to call annually is 6.86%

Step-by-step explanation:

The yield to call can be can be calculated using the rate formula in excel

=rate(nper,pmt,-pv,fv)

nper is the period to call, which is calculated 5 years the year of call multiplied by 2 as the coupon is paid twice a year that is 10

pmt is the semi-annual coupon payable by th bond, $1000*9%*6/12=$45

pv is the current price of the bond =coupon interest yearly/annual yield

coupon interest is $1000*9%=$90

annual yield is 8%

pv=90/8%=$1,125

fv is the call price at $1050

yield to call=rate(10,45,-1125,1050)

=3.43%

annual yield to call=3.43%*2

=6.86%