Question

4. Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)? *

A. 6.63%

B. 6.98%

C. 7.35%

D. 7.37%

E. None of the above.

Answer 1

Given about Sadik Inc,.'s bonds,

Current price = $1180

annual coupon = $100

years to call = 5

Call price = $1100

So, Yield to call can be calculated on financial calculator using following values:

PV = -1180

FV = 1100

N = 5

PMT = 100

compute for I/Y, we get I/Y = 7.30%

Approximate yield to call can be calculated using formula

Yield to call (Approx) = (coupon + (call price - pricP)/number of period)/(Price + call price)/2

=> YTC approx = (100 + (1100 - 1180)/5)/(1180 + 1100)/2 = 7.37%