Question

1. It is now January 1, 2019 and you are considering purchasing an outstanding bond that was issued on January 1, 2015. It has an 8.25% annual coupon and had a 15-year original maturity. (It matures on December 11, 2029.) There is a 6 years of call protection (until December 31, 2020), after which time it can be called at 112 – that is, at 112% of par or $1,120. Interest rates have declined since it was issued, and it is now selling a 116.609% of par, or $1,166.09.
   1. What is the yield to maturity? (5 points)
   2. What is the yield to call? (8 points)
   3. If you bought this bond, which return would you actually earn? Explain (4 points)

Answer 1

Coupon rate

8.25%

Coupon

82.5

Coupon payment

Annual

Time to maturity

11

Time to call

2

Call price

1120

Current price

1166.09

Yield to maturity

6.13%

RATE(11,82.5,-1166.09,1000,,)

Yield to Call

5.15%

RATE(2,82.5,-1166.09,1120,,)

Since the Yield to Call is lower than the Yield till maturity, the bond will be called and so investor will only earn Yield to Call