Question

Annasam Corporation recently issued 20-year bonds. The bonds have a coupon rate of 7 percent and pay interest semiannually. Also, the bonds are callable in 6 years at a call price equal to 115 percent of par value. The par value of the bonds is $1,000. If the yield to maturity is 8 percent, what is the yield to call? (Hint: 2 part problem using PV and rate) 7.75% 10.20% 13.45% 14.08%

Answer 1

Yield to call is the rate at which PV of cash flows are equal to PV of cash outflows till it is called.

Compuation of issue price of bond:

Bond Value = PV of cash flows arising from it

Computation of YTC:

YTC = rate at which +ve NPV + { [ NPV at that rate / Change in NPV for inc of 0.5% in rate ] * 0.5% }

= 5.5% + { [5.49 / 41.58] * 0.5% }

= 5.5% + 0.066%

= 5.566%

I.e 11.13% per anum