Question

Assume a municipal bond has 22 years until maturity and sells for $5,265. It has a coupon rate of 4.20 percent and it can be called in 12 years. What is the yield to call if the call price is 105 percent of par? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Yield to call:

Answer 1

Face Value = $5,000
Current Price = $5,265

Call Price = 105%*$5,000
Call Price = $5,250

Annual Coupon Rate = 4.20%
Semiannual Coupon Rate = 2.10%
Semiannual Coupon = 2.10%*$5,000
Semiannual Coupon = $105

Time to Call = 12 years
Semiannual Period to Call = 24

Let semiannual YTC be i%

$5,265 = $105 * PVIFA(i%, 24) + $5,250 * PVIF(i%, 24)

Using financial calculator:
N = 24
PV = -5265
PMT = 105
FV = 5250

I = 1.985%

Semiannual YTC = 1.985%
Annual YTC = 2 * 1.985%
Annual YTC = 3.97%

So, yield to call on this municipal bond is 3.97%