Question

a 12oupon bond, semiannual payments, is callable in 3 years. the call price is $1,120; if the bond is selling today for $1,110, what is the yield to call?

Answer 1

Based on the coupon rate, the call price and the selling price, the yield to call is 11.06%.

How is the yield to call found?

The formula to find it is:

= (Coupon + (Call price - Current price) / Number of periods ) / ( (Call price + Current price) / 2 ) x 2

Solving gives:

=( (12%/2  x 1,000) + (1,120 - 1,110) / 6 semi annual periods ) ) / ( (1,120 + 1,110) / 2) x 2

= (61.667 / 1,115) x 2

= 11.06%

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