Question

Three years ago, company inc. issued 30 year, 5.3%semi annual coupon bonds that currently trade for $788. If each bond features a 5-year deferred call feature with a 2 coupon payment penalty in addition to face value ($1000), what is the yield to call?

Step by step, no graphs or charts, no financial calculator

Answer 1

Calculation of yield to Call/Maturity of a Bond:-

Pro-Rated Discount : - (Redemption Price – Issue price)/Term of a bond

                                            = ($1,053 - $788)/35 Years = 7.57

Redemption Price = [$1000 + ($1000*5.3%*6/12)*2] = $1,053

Yield to Maturity (YTM):- 2 * (1/2*Coupon Return + ½*Pro rated Discount) / ½*(Redemption price + Purchase Price)

YTM = 2* (1/2* 53 +1/2 * 7.57) / ½ * ($1,053 + $788)

           = 2 * (30.285/920.5)

           = 0.0658 Or 6.58%