Question

Delta Corporation has a bond issue outstanding with 25 years remaining until maturity. The bond has a coupon rate of 4.5 percent, paid semiannually. The bonds are currently selling for $992.80 and are callable in two years with a call premium of 2 percent.
a. What is the yield to maturity?

b. What is the yield to call?

Answer 1

Hello Sir/ Mam

(a)

Time to maturity = 25 * 2 periods = 50 periods

Maturity Value = $1,000

Coupon Payment = 4.5%/2 of $1,000 = $22.50

Present Value = $992.80

Hence,

Hence, evaluating this equation, or using Excel Formula, "=RATE(50,22.5,-992.8,1000,0)", we find the yield to maturity = 2.2743%. It is a semiannual yield.

Hence, annual yield to maturity = 2.2743% * 2 = 4.5486%

(b)

Time to maturity = 2 * 2 periods = 4 periods

Maturity Value = $1,020

oupon Payment = 4.5%/2 of $1,000 = $22.50

Present Value = $992.80

Hence,

Hence, evaluating this equation, or using Excel Formula, "=RATE(4,22.5,-992.8,1020,0)", we find the yield to maturity = 2.9219%. It is a semiannual yield.

Hence, annual yield to maturity = 2.9219% * 2 = 5.8438%

I hope this solves your doubt.

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