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%