Question

Suppose GM has an 8% coupon rate, 30-year maturity, callable coupon bond currently selling for 115.0 and is callable 10 years from now at a call price of 110.0. What is the yield to call (YTC) for the bond? (Round to two decimal places)

Answer 1

As the coupon frequency is not given, it is assumed to be semiannual, since corporate bonds usually pay semiannual coupons.

YTC is calculated using RATE function in Excel with these inputs :

nper = 10*2 (10 years to call date with 2 semiannual coupon payments each year)

pmt = 100 * 8% / 2 (semiannual coupon payment = face value * annual coupon rate / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -115 (current bond price. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 110 (call price of the bond receivable on call date. This is a positive figure as it is an inflow to the bondholder)

The RATE calculated is the semiannual YTC. To calculate the annual YTC, we multiply by 2.

Annual YTC is 6.64%