Question

1. Three years ago, Dinoco issued 30-year, 4.0% semi-annual coupon bonds that currently trade for $832. If each bond features a 7-year deferred call feature with a 4 coupon payment penalty in addition to face value ($1000), what is the yield-to-call?

   		9.1%
   		6.3%
   		7.6%
   		5.3%
   		10.9%

Please show all work, and what to put into financial calculator!

Answer 1

Sol:

Present value (PV) = $832

Annual coupon rate = 4%, Semiannual coupon rate = 4 / 2 = 2%

Annual coupon payment (PMT) = 1000 x 4% = $40, Semiannual coupon payment = 40 / 2 = $20

Face value (FV) = $1,000 + 4 coupon payment penalty = 1000 + (20 x 4) = 1,080

Period (N) or (NPER) = Bond was issued 3 years ago with 7-year deferred call feature, hence current period will be (7 - 3) = 4 years, Semiannual period = 4 x 2 = 8

To determine yield-to-call (I/Y) we can use Rate function in excel:

FV	1080
PV	-832
PMT	20
NPER	8
Semiannual rate	5.47%
Annual rate	10.9%

Therefore annual yield-to-call will be 10.9%

Answer = 10.9%

Working