Answer:
a.
5.72%
b.
6.83%
c.
2.86%
Explanation:
The rate of return bondholders receives on a callable bond until the call date is called Yield to call.
Yield to Call = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]
Assuming $1,000 is the face value of bond.
a.
Yield to Call = [ ($1,000 x 8% x 6/12 ) + ( $1,000 - $1,100 ) / (5 x 2) ] / [ ( $1,000 + $1,100 ) / 2 ]
Yield to Call = [ $40 - 10 ] / $1,050 = 2.86% semiannually = 5.72% yearly
b.
Yield to Call = [ ($1,000 x 8% x 6/12 ) + ( $1,000 - $1,050 ) / (5 x 2) ] / [ ( $1,000 + $1,050 ) / 2 ]
Yield to Call = [ $40 - 5 ] / $1,025 = 3.415% semiannually = 6.83% yearly
c.
Yield to Call = [ ($1,000 x 8% x 6/12 ) + ( $1,000 - $1,100 ) / (2 x 2) ] / [ ( $1,000 + $1,100 ) / 2 ]
Yield to Call = [ $40 - 10 ] / $1,050 = 1.43% semiannually = 2.86% yearly
