Question

Sadik Inc.'s bonds currently sell for $1,470 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,000. What is their yield to call (YTC)? Question 15 options: a) 6.89% b) 5.89% c) 5.18% d) -2.27% e) 6.30%

Answer 1

In order to compute yield to call we have to assume that the bond matures in 5 years rather than 15 years. Call price is the principal at maturity.

Current bond price and YTC are related as:

P = C x [1-(1+YTC) ^‑t/YTC] + CP/ (1+YTC) ^t

P = Current bond price = $ 1,470

C = Annual coupon payment = $ 65

CP = Call price = $ 1,000

YTC = Yield to call on the bond

t = Time to call

We can Compute IRR of investment using excel sheet which is YTC of the bond.

	A	B
1	Year	Cash Flow
2	0	-$ 1,470
3	1	$ 65
4	2	$ 65
5	3	$ 65
6	4	$ 65
7	5	$ 1,065
8	IRR	-2.27%

Considering the above table as excel sheet, use formula “=IRR(B2:B7) in cell B8 to get IRR as -2.27 %.

Hence yield to call of the bond is – 2.27 %

Option “d) – 2.27 %” is correct answer.