Question

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,105. What is the bond's nominal yield to call?

Select the correct answer. a. 5.80% b. 5.50% c. 5.35% d. 5.95% e. 5.65%

Answer 1

Answer = d. 5.95%

Notes:

Price of bond = Coupon * PVIFA (n,i)+ face value * PVIF (n,i)

Price of bond= (1000*8.75%/2) * PVIFA (30 ,6.5%/2) + 1000* PVIF (30 ,6.5%/2)

Price of bond = 43.75 *18.9819174099042 + 1000 * 0.3830876841781120  

= $ 1,213.54657086142

Using the approximate formula,

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

Since the Approximate formula does not give the exact answer, we use the financial calculators where,

Face Value = $ 1000

Price = $ 1,213.54657086142

Coupon Rate = 8.75%

Years to Call = 6

Call Price = $ 1105

Call Premium = $ 1105/1000*100

= 110.5%

Coupon Payments = 2

Years to Call =4 Years

Hence, Yield to Call = 5.95%