Question

A company currently has a 10 years bond that is callable in 2 years from today with a call premium of 1%. This bond annual coupon rate is 3% paid semi-annually and it is currently selling at $985 per share. What is the bond annual yield to call and the bond annual yield to maturity? Also, if general interest rate is expected to remains unchanged, based on comparison between yield to call and yield to maturity that you have calculated, do you think is best for this company to call this bond today and why or why not?

Answer 1

Number of periods =10*2 =20
Semi annual Coupon =3%*1000/2 =15
Price of Bond =985
YTM using financial calculator
N=20;PMT=15;PV=-985;FV=1000 CPT I/Y =1.5881%
YTM =2*1.5881% =3.18%

Call Premium =1%*1000 =10
Call Value =1000+10 =1010
Number of Periods to call =2*2 =4
YTC using financial calculator
N=4;PMT=15;PV=-985;FV=1010;CPT I/Y =2.1374%
YTC =2*2.1374% =4.27%

No it is not best to call the bond today as YTC is more than YTM and the interest it has to pay would be more.