Question

ABC's Inc.'s 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)?

Answer 1

Using the approximate formula,

Yield to Call =[ Annual Interest + ( Call Price- Market Price ) / Number of Years to Call ]/ (Call Price + Market Price)/2

[ $ 135+ ( $ 1,050 - $ 1,280)/ 5] / [( $ 1,050 + $ 1,280)/ 2]*100

= 89/ 1,165*100

= 7.64%

Since this formula gives an approximate answer, we use the financial calculator,

Using the financial calculators, Yield to call is calculated as under :

Face Value = $ 1,000

Price = $ 1,280

Coupon Rate = 13.50%

Years to Maturity = 15

Call Price = $ 1,050

Years to Call =5 Years

Hence, Yield to Call = 7.45%

Hence the correct answer is 7.45%