Question

Yield-to-Call

A company issues a callable bond with the following features:

• 7% coupon rate
• Semi-annual coupon payments
• $1,000 face value
• Matures in 15 years
• The bond may be called after 3 years.
• Call premium: If the bond is called anytime during the 2-years period beginning 3 years from today and ending 5 years from today, the company will pay a face value of $1,250 instead of $1,000.

Compute the yield an investor will earn buying the bond today for $1,233.10 if it is called in exactly 3 years and one day from today (the first day is it eligible to be called).

Answer 1

K = Time to callx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTC/2)^k]     +   Call Price/(1 + YTC/2)^Time to callx2

k=1

K =3x2

1233.1 =∑ [(7*1000/200)/(1 + YTC/200)^k]     +   1250/(1 + YTC/200)^3x2

k=1

YTC% = 6.1