Question

our firm has a 7-year, RM 1,000 par outstanding bond with an 8.25 percent annual coupon. The current yield to maturity is 7.1 percent. The bond can be called in three years at a call price of RM 1,020. Assume there will be no change in the term structure of interest rates, what is the estimated yield to call of this bond?

Answer 1

Coupon = 82.5

YTM = 7.1%

Number of period = 7 years

Face Value = 1000

Bond price = ?

Bond price = Coupon * (1-((1+YTM)^(-Number of periods))/YTM)+(Face value/((1+YTM)^Number of periods)

Bond price = 82.5*((1-((1+7.1%)^(-7)))/7.1%)+(1000/((1+7.1%)^7))

Bond price = 1061.76

Yield to Call:

PV= 1061.76

FV= 1020

PMT=82.5

N= 3 years

Yield to maturity = (Coupon payment + ((Face value - Price) / Periods to maturity)) / ((Face value + Price)/2)

Yield to call = (85 + ((1020 - 1061.76) / 3)) / ((1020 + 1061.76)/2)

Yield to call = 6.83%