Question

keenan industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments and a $1000 par value. the bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,150. what is the bonds nominal yield to call?

Answer 1

Face value of the bond= $1,000,

Nominal coupon= 8.25%,

Effective nominal coupon= 8.25%/2= 4.1250% (semi-annual payments),

Maturity (years) = 15,

NPER= 15 * 2= 30,

PMT= $1000 * 4.1250%= $41.25,

Nominal yield to maturity= 6.50%,

Effective nominal yield to maturity= 6.50%/2= 3.25%.

Hence, the current market value of the bond can be calculated in MS Excel by employing the present value function as follows:

=PV (rate, nper, -pmt, -face value) =PV (3.25%, 30, -41.25, -1000) = $1,166.09.

The formula for nominal yield to call (YTC) of the bond is provided below:

YTC = Annual coupon payments + (Call price – Market value)/Number of years until call

(Call price + Market value)

2

        = (82.5 – 2.68)/1,158.05 = 6.89%.