Question

A 6.75 percent coupon bond with 13 years left to maturity can be called in two years. The call premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.

Answer 1

YTC = 14.23%

Step-by-step explanation:

the yield to call formula is:

YTC = {coupon payment + [(call price - market price) / n]} / [(call price + market price) / 2]

YTC = {$33.75 + [($1,067.50 - $919.75) / 4]} / [($1,067.50 + $919.75) / 2]

YTC = ($33.75 + $36.94) / $993.63 = 0.0711 x 2 (semiannual coupon) = 0.1423 = 14.23%