Question

Fooling Company has a callable bond outstanding with a coupon of 12.2 percent, 25 years to maturity, call protection for the next 10 years, and a call premium of $25. What is the yield to call (YTC) for this bond if the current price is 110 percent of par value? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Answer:9.5354% or 9.6%

Explanation:

PMT = coupon (interest) payment = 12.2 % * $1,000 = $120

Let t = time left until bond is called = 10 years

Let F be the  face value = $ 1,100 ($ 1,000 + $ 100 (Call premium))

Let the Current bond price = 110 %  x 1,000 = $1,100

Now,

The bond price is = PMT x 1-( 1 + r )⁻t / r + F/(1 + r )t

Therefore,

1100 = 100 x 1 - (1 + r)⁻¹⁰/r + 1100/(1 + r)¹⁰

Using the trial and error method,

r= 9.5354%

Then the yield to call (YTC) = 9.5354

9.5354%