Answer:
YTM = 6.88%.
YTC = 4.26%.
Explanation:
a. Calculation of Yield to Maturity (YTM)
The bond's Yield to Maturity can be calculated using the following RATE function in Excel:
YTM = RATE(nper,pmt,-pv,fv) .............(1)
Where;
YTM = yield to maturity = ?
nper = number of periods = number of years to maturity = 25
pmt = annual coupon payment = $90 = 90
pv = present value = current bond price = $1,250 = 1250
fv = face value or par value of the bond = 1000
Substituting the values into equation (1), we have:
YTM = RATE(25,90,-1250,1000) ............ (2)
Inputting =RATE(25,90,-1250,1000) into excel (Note: as done in the attached excel file), the YTM is obtained as 6.88%.
Therefore, YTM is 6.88%.
b. Calculation of Yield to Call (YTC)
The bond's Yield to call can be calculated using the following RATE function in Excel:
YTC = RATE(nper,pmt,-pv,fv) .....................(3)
Where;
YTM = yield to call = ?
nper = number of periods = number of years to call = 5
pmt = annual coupon payment = $90 = 90
pv = present value = current bond price = $1,250 = 1250
fv = future value of the bond or the amount at which the bond can be called = $1,050 = 1050
Substituting the values into equation (3), we have:
YTM = RATE(5,90,-1250,1050) ............ (4)
Inputting =RATE(5,90,-1250,1050) into excel (Note: as done in the attached excel file), the YTC is obtained as 4.26%.
Therefore, YTC is 4.26%.
