Question

A company currently has an 8 years bond that is callable in 3 years from today with a call premium of 1%. This bond annual coupon rate is 9% paid semi-annually and it is currently selling at $1,020 per share. What is the bond annual yield to call and the bond annual yield to maturity? Also, if general interest rate is expected to remains unchanged, based on comparison between yield to call and yield to maturity that you have calculated, do you think is best for this company to call this bond today and why or why not?

Answer 1

Given :
Yearn to Maturity	8
Years to call	3
Face value	1000
Annual Coupon @9%=	90
Current Market Price	1020
Call price with 1% premium=	1010
Yield-to-Call Approximation Formula for Bonds
Annual Interest Payment + (Call Price – Market Price)/Number of Years until Call
(Call Value + Market Price)/2
YTC=[90+(1010-1020)/3]/(1010+1020)/2=8.54%
So Yield to call is 8.53%
YTM formula
YTM = [Annual interest +(Face value-market price)/n]/(Face value +2*market price)/3
YTM =[90+(1000-1020)/8]/(1000+2*1020)/3
YTM =8.64%
Using Excel foprmual Rate , we also get YTM =8.64%
Since the Yield to call is lesser than the Yield to Maturity,
the issues should call the bond and it will be lesst costly for the
company to call the bond than to hold it till maturity.