Question

Say you have a bond with the following characteristics: Face Value = $1000 Price = $800 Coupon Rate = 4% Time to Maturity = 10 years Call Premium = $100 What is the yield to call on the bond if the bond is called in year 6? Group of answer choices 7.63% 8.38% 8.00%

Answer 1

Answer :- None of above answer choice.

(Yield to call on bond = 2.46 % approx. Please see the below calculation for yield to call on bond).

Explanation :- Call premium = Call price - Face value.

100 = Call price - 1000

Call price = 1000 + 100

Call price = $ 1100.

Yield to call = [ Coupon amount + (Face value of bond - Call price) / Number of Years to call for bond] / (Face value of bond + Call price) / 2

= [ 4 % of 1000 + (1000 - 1100) / 6 ] / (1000 + 1100) / 2

= [ 40 - 100 / 6 ] / (2100 / 2)

= [ 40 - 16.6667 ] / 1050

= 23.3333 / 950

= 0.0246 i.e., 2.46 % (approx).