A 7-year, $1,000 par bond has an 8% annual coupon and is currently yielding 7.5%. The bond can be called in 3 years at a call pr

Question

2 years ago

6

ice of $1,010. What is the bond yielding, assuming it will be called (known as the yield to call)?

1 answer:

AVprozaik [17] · Answer 1 · 2022-12-21T14:59:28+03:00

The Yield to call is 7.30%

Par value of Bond (FV) = $1,000

Annual Coupon (A) = 8%*1,000 = $80

Years until maturity = 8

Current YTM = 7.5%

We need to calculate the Current Price of Bond (PV)

PV = 80 * (P/A, 0.075, 7) + 1000 * (P/F, 0.075, 7)

PV = $1,026.48

Call Price = $1,010

Call Period = 3 years

Yield to call = ytc

1026.48 = 80* (P/A, ytc, 3) + 1010 * (P/F, ytc, 3)

Using the <em>trail and error </em>method,

Yield to call = 7.30%

In conclusion, the Yield to call is 7.30%