Question

Jack purchased Ford Motor Company’s bond for $950. The coupon rate is 6%. The bond is scheduled to mature in 6 years. However, in year 4, the company decided to buy back its bonds at $1,200. What is his yield to call (YTC)?

A. 5.8%

B. 7.9%

C. 11.7%

D. 15.8%

Answer 1

Yield to call (YTC) is the return receieved by the bond holder if he holds the bond till the date the bond is called. It can be calculated using the following formula.

P= (C/2)*((1-(1+YTC/2)^-2t)/(YTC/2))+(CP/(1+YTC/2)^2t), where P= Current price of the bond; C is the coupon payments; YTC is the yield to call and t is the time left for the call date.

On substituting, 950= 30*((1-(1+YTC/2)^-8)/(YTC/2))+(1200/(1+YTC/2)^8). On solving, we get YTC close to 11.7%.

So, Yield to Call is 11.7%