Question

Meacham Enterprises' bonds currently sell for $1,430 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?

Select the correct answer. a. 6.09% b. 4.09% c. 5.09% d. 4.59% e. 5.59%

Answer 1

Answer = d. 4.59%

Notes:

Using the financial calculators, Yield to call is calculated as under :

Face Value = $ 1000

Price = $ 1430

Coupon Rate = $ 135/1000*100

= 13.5%

Years to Call = 5

Call Price = $ 1050

Call Premium = $ 1050/1000*100

= 105%

Hence, Yield to Call = 4.59%

Also, Using the approximate formula,

Yield to Call =[ Annual Interest + ( Call Price- Market Price ) / Number of Years to Call ]/ (Call Price + Market Price)/2

[ $ 135+ ( $ 1,050 - $ 1430)/ 5] / [( $ 1,050 + $ 1,430)/ 2]*100

= 59/1240*100

= 4.76%

Since the approximate formula doesnot give the exact answer, we use the financial calculator to compute the answer.