Question

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,115. What is the bond's nominal yield to call?

Select the correct answer.

a. 6.53%

b. 6.07%

c. 6.76%

d. 5.84%

e. 6.30%

Answer 1

Answer : Correct Option is (b.) 6.07%

Calculation of Bond's Nominal Yield to call

For the purpose of Calculation of Bond's Yield to call we need to calculate its Present Value

Using Financial Calculator

=-PV(rate,nper,pmt,fv)

where rate = 6.50% / 2 = 3.25%(as semiannual coupon)

nper = 15 * 2 =30

pmt = 1000 * (8.75% / 2 ) = 43.75

fv = face value i.e 1000

=-PV(3.25%,30,43.75,1000)

=1213.55

Now Calculation of Bond's Nominal Yield to call

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of call years i.e 6*2 = 12

pmt is Interest payment i.e 1000 * (8.75% / 2 ) = 43.75

pv is Present value calculated above

= - 1213.55

Note : pv should be taken as negative.

fv is Call price i.e 1115

=RATE(12,43.75,-1213.55,1115)

therefore ,Nominal Yield to call is 3.034%(semi annual)

Nominal Yield to call is 6.068 or 6.07% (Annual)