Question

An 8% coupon bond, $1,000 par value, annual payments, 10 years to maturity is callable in 7 years at a call price of $1,200. If the bond is selling today for $900, the yield to call is closest to

Answer 1

Yield to call

=

Average Income/Average Investment

=

((Coupon+(Call price-Current Selling price)/Years to call)/((Current Selling price+Call price)/2)

=

((80+(1200-900)/7)/((1200+900)/2))

=

11.70%

Working:

Annual coupon

=

Par Value x Coupon rate

=

$       1,000

x

8%

=

$             80