Question

Let's say you buy a bond with a face value of $1,000 and a coupon rate of 5%, so the annual interest payments are $50. The bond matures in 10 years, but the issuer can call the bond for $1,050 in two years if they choose. You buy the bond for $960, a discount to face value. What is the yield to call (i.e., YTC)

Answer 1

YTC = 9.45%

Step-by-step explanation:

Given Data;

Face value = $1000

Coupon rate = 5%

Coupon interest = $50

Maturity years = 10 years

Call price = $1050

Discounted face value = $960

Call date = 2 years

YTC = ?

To calculate the yield to call ( YTC), we use the formula;

YTC = C + (CP -FP)/n ÷ (CP + FP )/2

Where;

C = coupon interest

CP = call price

FP = face value (market value)

n= number of years

substituting into the formula, we have

YTC = (50 + (1050 -960)/2) ÷ (1050 +960)/2

= (50 + 45) /1005

= 95/1005

= 0.0945 * 100

9.45%

Answer 2

the yield to call of this bond is: 5.48%

Step-by-step explanation:

Given:

• Face value: $1,000 (FP)
• Coupon rate of 5% => Coupon payment is: 5%*1000 = $50 (C)
• Call price of bond $960 (CP)
• n = 10 years

As we know that, the formula to find out yield to call is:

YTC =
`(C + (FP- CP)/n)/((FP+CP)/2)`

=
`(50 + (1000-960)/10)/((1000+960)/2)`

= 0.0548

= 5.48%

So the yield to call of this bond is: 5.48%