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10. Regal Health Plans issued a 12% annual coupon bond with a $1,000 par value a...

10. Regal Health Plans issued a 12% annual coupon bond with a $1,000 par value a few years ago. The bond now has ten years remaining to maturity and sells for $1,100. The bond has a call provision that allows Regal to call the bond in two years at a call price of $1,200. What is the bond’s yield to call? Choice: 5.07% Choice: 14.57% Choice: 15.13% Choice: 100.0

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Answer #1

Step 1

To calculate yield first we will have to build a time line of cash flows

Year 0 = Outflow of 1100

Year 1 = Inflow of coupan payment of 120

year 2 = coupan payment of 120 + Call price 1200

Therfore we have following cash flows

Year Cash Flow
0 -1100
1 120
2 1320

Step 2 - calculation of YTM

YTM is the rate at which if we discount the cash flow of year 1 and 2, we will get the present value equal to 1100 (purchase price)

Use the following steps in financial calculator

PV = -1100

FV = 1200

PMT = 120

N = 2

CPT - I/Y = 15.13%

Alternatively you can use IRR function in excel IRR = YTM = 15.13%

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