Question

ABC Co. bonds have a term to maturity of 15 years, callable, 8% semi-annual coupon bonds at their par value of $1000. the bond is selling for $925 today. the call price is $1080. if the bond is expected to be called in 5 years, how much is the yield to call?

Answer 1

Solution :- Coupon rate = 8 % * 6 / 12 = 4 % (Semi-annual coupon pay).

Time period to call for bond = 5 * 12 / 6 = 10 Semi-annual periods.

Call price of bond = $ 1080.

Face value of bond = $ 1000.

Calculation of Yield to call (YTC) on bond :-

= [ Coupon amount on bond + (Face value of bond - Call price of bond) / Time to call for bond ] / (Face value of bond + Call price of bond) / 2

= [ 1000 * 4 % + (1000 - 1080) / 10 ] / (1000 + 1080) / 2

= [ 40 + (-) 80 / 10 ] / (2080 / 2)

= (40 - 8) / 1040

= 32 / 1040

= 0.0308 i.e., 3.08 % (Semi-annually)

Therefore, annual yield to call (YTC) on the bond = 3.08 * 12 / 6 = 6.16 %

Conclusion :- Yield to call = 6.16 % (approx).