Question

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, 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 $1,050. What is the bond's nominal yield to call?

Answer 1

5.28%

Step-by-step explanation:

For determining the nominal yield to call, first we have to find out the present value which is shown below:

Given that,

Future value = $1,000

Rate of interest = 6.50% ÷ 2 = 3.25%

NPER = 15 years × 2 = 30 years

PMT = $1,000 × 8.75% ÷ 2 = $43.75

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, after solving this, the present value is $1,213.55

Now the nominal yield to call is come after applying the RATE formula which is shown below:

Given that,

Present value = $1,213.55

Future value or Face value = $1,050

PMT = 1,000 × 8.75% ÷ 2 = $43.75

NPER = 6 years × 2 = 12 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after solving this, the yield to call is

= 2.64% × 2

= 5.28%