Question

Price a 2y 5.3% semi-annual pay bond, callable at 102, assuming rate volatility is 15% and yields are as below. Once you have priced this bond, calculate its annualized yield to call.

T	Y(0,t)
0.5	1.2%
1	3.2%
1.5	4.5%
2	5.3%

Answer 1

Answer :

Price of the callable bond - 102.04

Yield to Call - 1.30%

Pricing the bond

We will be executing the call at t = 0.5 when the discounted value > callable price

Annualized Yield To Call

YTC = (C + (CP - P) / t) / ((CP + P) / 2)

Where:

• YTC = yield to call
• C = annual coupon
• CP = call price of the bond
• P = price of the bond
• t = time in years until maturity