Question

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% coupon paid semiannually, and a $1,000 par value. The bond has a 6.75% nominal yield to maturity, but it can be called in 4 years at a price of $1,085. What is the bond’s nominal yield to call? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Answer 1

Given about Keenan Industries,

Years to maturity = 15 years

coupon rate = 8.25% paid semiannually,

Face value = $1000

=> Semiannual coupon payment = (8.25%/2) of 1000 = $41.25

YTM of the bond = 6.75%

So, current price of the bond can be calculated on financial calculator using following values:

FV = 1000

N = 2*15 = 30

I/Y = 6.75/2 = 3.375

PMT = 41.25

compute for PV, we get PV = -1140.13

So, current price of the bond is $1140.13

It is a callable bond. It can be called in 4 years at a price of $1085. so, for Yield to call, use following values on financial calculator:

FV = 1085

PV = -1140.13

N = 2*4 = 8

PMT = 41.25

compute for I/Y, we get I/Y = 3.076

So, Nominal annual Yield to call = 2*3.076 = 6.15%