Question

In 2020, a customer buys 1 GE 10%, $1,000 par debenture, M '35, at 115. The interest payment dates are Jan 1st and Jul 1st. The bond is first callable in 2030 at 102. The yield to call on the bond is

Answer 1

The yield to call on the bond is 9.37%.

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 face value = 10% * $1,000 = $100

CP = Call price of the bond = $1,000 * 102% = $1,020

P = price of the bond = $1,000 * 105 = $1,050

t = time in years remaining until the call date = 10 years

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

YTC = (100 + (1,020 - 1,050) / 10) / ((1,020 + 1,050) / 2)

YTC = (100 - 30 / 10) / (2,070 / 2)

YTC = (100 - 3) / 1,035

YTC = 97 / 1,035

YTC = 0.0937, or 9.37%

Therefore, the yield to call on the bond is 9.37%.