Question

A company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $104 per $100 of face value. What is the yield to worst of this bond when it is released

Answer 1

6.32%

Step-by-step explanation:

This can be calculate using the YTC using the following equation:

YTC = (C + (CP - P) / t) / ((CP + P) / 2) .......................... (1)

Where:

YTC = YTW = yield to call or yield to worst = ?

C = annual coupon interest payment = bond interest rate * Bond price = 6% * $100 = $6

CP = call price of the bond = $104

P = price of the bond = $100

t = time in years remaining until the call date = 10 - 1 = 9 years

Substituting the values into equation (1), we have:

YTC = ($6 + ($104 - $100) / 9) / (($104 + $100) / 2) = 0.0632, or 6.32%