Question

A 14-year, 14% semiannual coupon bond with a par value of $1000 may be called in 5 years at a call price of $1030. The bond sells for $1150 (assume the bond has just been issued).

a. What is the bond's yield to maturity?

b. What is the bond's current yield?

c. What is the bond's capital gain or loss yield?

d. What is the bond's yield to call?

Answer 1

Number of Years Till Maturity = 14
Number of Periods = 14*2 =28
Par Value = 1000
Price = 1150
Coupon = 14%*1000/2 = 70
a. Bond's YTM Using Excel formula =2*RATE(28,70,-1150,1000) = 11.79%
Alternate method :YTM uisng Financial calculator
N= 28; PMT = 70; PV = -1150 ; FV = 1000 CPT I/Y
YTM = 2*I/Y = 11.79%

b. Current yield = Coupon *2/Price = 70*2/1150 = 12.17%

c. Capital Loss = YTM - Current yield = 11.79% -12.17% = -0.39%

d.
Number of Years Till Call = 5
Number of Periods = 5*2 = 10
Call Value = 1030
Price = 1150
Coupon = 14%*1000/2 = 70
Bond's YTC (Yield to Call  Using Excel formula =2*RATE(10,70,-1150,1030) = 10.54%

Alternate method :YTC using Financial calculator
N= 10; PMT = 70; PV = -1150 ; FV = 1030 CPT I/Y
YTC = 2*I/Y = 10.54%