Question

H Corporation has a bond outstanding. It has a coupon rate of 9 percent and a $1000 par value. The bond has 5 years left to maturity but could be called after three years for $1000 plus a call premium of $60. The bond is selling for $1060. The yield to call on this bond is _________

Answer 1

The correct answer is 8.49%

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

Face Value = $ 1,000

Price = $ 1060

Coupon Rate = 9%

Years to Maturity = 5

Call Price = $ 1,060

Years to Call =3 Years

Hence, Yield to Call = 8.49%

Also, Using the approximate formula,

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

[ $ 90+ ( $ 1,060 - $ 1,060)/ 3] / [( $ 1,060 + $ 1,060)/ 2]*100

= 90/ 1,060*100

= 8.49%