Question

Greshak Corp. currently has bonds outstanding that trade for $1,080.60 in the market. Each bond has a $1,000 par value, an annual coupon rate of 8.50% (paid semiannually), and have 18 years remaining to maturity. In the market, this bond currently has a 7.70% nominal yield to maturity, but it can be called in 6 years at a price of $1,060. What is the bond's EXACT Yield to Call (YTC)? Select one: a. 7.61% b. 3.80% c. 4.26% d. 10.60% e. 8.52%

Answer 1

Answer:
Face Value = $1,000
Current Price = $1,080.60
Call Price = $1,060

Annual Coupon Rate = 8.50%
Semiannual Coupon Rate = 4.25%
Semiannual Coupon = 4.25% * $1,000 = $42.50

Time to Call = 6 years
Semiannual Period to Call = 12

Let semiannual YTC be i%

$1,080.60 = $42.50 * PVIFA(i%, 12) + $1,060 * PVIF(i%, 12)

Using financial calculator:
N = 12
PV = -1080.60
PMT = 42.50
FV = 1060

I = 3.805%

Semiannual YTC = 3.805%
Annual YTC = 2 * 3.805%
Annual YTC = 7.61%

Option a is correct.