Question

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?a. 6.39%b. 6.72%c. 7.08%d. 7.45%e. 7.82%

Answer 1

Answer:

The answer is d. 7.45%

Explanation:

B = Current Price of the Bonds  $1,280

C = Coupon payment paid out annually  $135

CP = Call price   $1,050.

T= number of years pending until the call date 5 years

Yield to Call Formula = (C/2) * {(1- ( 1 + YTC/2)^-2t) / (YTC/2)} + (CP/1 + YTC/2)^2t)

$1,280  = ($135/2) * {(1- ( 1 + YTC/2)^-10) / (YTC/2)} +($1,050 /1 + YTC/2)^10) = 7.45%