Question

Seven years ago Hangar Corp. issued a 25-year bond with a 6
percent *semi-annual* coupon. The bond currently sells for
$815. (a) What is the bond’s yield to maturity (YTM)? (b) If the
bond can be called in six years for redemption price of $1,075,
what is the bond’s yield to call (YTC)?

Answer #1

Answer a.

Par Value = $1,000

Current Price = $815

Annual Coupon Rate = 6%

Semiannual Coupon Rate = 3%

Semiannual Coupon = 3% * $1,000

Semiannual Coupon = $30

Time to Maturity = 18 years

Semiannual Period = 36

Let Semiannual YTM be i%

$815 = $30 * PVIFA(i%, 36) + $1,000 * PVIF(i%, 36)

Using financial calculator:

N = 36

PV = -815

PMT = 30

FV = 1000

I = 3.975%

Semiannual YTM = 3.975%

Annual YTM = 2 * 3.975%

Annual YTM = 7.95%

Answer b.

Call Price = $1,075

Current Price = $815

Semiannual Coupon = $30

Time to Call = 6 years

Semiannual Period = 12

Let Semiannual YTC be i%

$815 = $30 * PVIFA(i%, 12) + $1,075 * PVIF(i%, 12)

Using financial calculator:

N = 12

PV = -815

PMT = 30

FV = 1075

I = 5.615%

Semiannual YTC = 5.615%

Annual YTC = 2 * 5.615%

Annual YTC = 11.23%

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