Question

Marco Verratti's bonds currently sell for $1,175.89with par value of $1,000.00.  The bonds pay 13.00 percent coupon rate and have a 17-year maturity, but they can be called in 6 years at $1,097.00. There are no costs but the call premium and refund the bonds.  In addition, assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the bonds’ yield to maturity? What is the bonds’ yield to call?

Answer 1

Yield to Maturity:

Face Value = $1,000
Current Price = $1,175.89

Annual Coupon Rate = 13%
Annual Coupon = 13% * $1,000
Annual Coupon = $130

Time to Maturity = 17 years

Let annual YTM be i%

$1,175.89 = $130 * PVIFA(i%, 17) + $1,000 * PVIF(i%, 17)

Using financial calculator:
N = 17
PV = -1175.89
PMT = 130
FV = 1000

I = 10.71%

Annual YTM = 10.71%

Yield to Call:

Call Price = $1,097
Current Price = $1,175.89
Annual Coupon = $130
Time to Call = 6 years

Let annual YTC be i%

$1,175.89 = $130 * PVIFA(i%, 6) + $1,097 * PVIF(i%, 6)

Using financial calculator:
N = 6
PV = -1175.89
PMT = 130
FV = 1097

I = 10.19%

Annual YTC = 10.19%