Question

Rocky Industries has a bond outstanding with 15 years to maturity, and 7% nominal coupon, semiannual payments, and a $1,000 par value.  The bond has a 5% nominal yield to maturity, but it can be called in 5 years at a price of $1,120.  What is the bond’s nominal yield to call? ?

Answer 1

Coupon rate = 7%

YTM = 5.0 %

Maturity 15

Par value $1,000

Periods/year 2

Determine the bond's price:

PMT/period = $35

N =30

I/YR = 2.50%

FV = $1,000.00

PV = Price = Interest * PVIFA (r, N) + FV * PVIF (r, N)

= $35 * PVIFA (5, 30) + $1000 * (5,30)

= $35 * 20.93029 + $1000 * 0.476743

= $ 1209.30

Years to call = 5

Call price = $1,120

Determine the bond's YTC:

N = 10

PV = $1,209.30

PMT = $35

FV = $1,120.00

I/YR = Annual interest + (Call price - Market price)/N / (Call price + Market price)

= 35 + [(1120 – 1209.30)/10 ]/ [(1120 + 1209.30)/2]

I/YR = 2.36%

Nom. YTC = 4.72%