Question

General Electric has just issued a callable​ (at par)​ 10-year, 5.7 % coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price of $ 101.87. a. What is the​ bond's yield to​ maturity? b. What is its yield to​ call? c. What is its yield to​ worst?

Answer 1

Part 1)

The yield to maturity of the bond can be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT,-PV,FV) where Nper = Period, PMT = Payment (here, Coupon Payment), PV = Present Value (here, Current Value of Bonds) and FV = Future Value (here, Face Value of Bonds).

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Here, Nper = 10, PMT = 100*5.7% = $5.7, PV = $101.87 and FV = $100

Using these values in the above function/formula for Rate, we get,

Yield to Maturity = Rate(10,5.7,-101.87,100) = 5.45% (answer for Part 1)

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Part 2)

The yield to call can again be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT,-PV,FV) where Nper = Period, PMT = Payment (here, Coupon Payment), PV = Present Value (here, Current Value of Bonds) and FV = Future Value (here, Face Value of Bonds).

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Here, Nper = 1, PMT = 0 = $5.7, PV = $101.87 and FV = 100 + 100*5.7% = 105.7

Using these values in the above function/formula for Rate, we get,

Yield to Call = Rate(1,0,-101.87,105.7) = 3.76% (answer for Part 2)

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Part 3)

Since, the bond can be called in one year, the bondholders will lose the interest payments for the remaining 9 years if the bond is actually called at the end of first year itself. In such a case, the maximum return that would be available to bondholders would be same as yield to call of 3.76%.

Yield to Worst = 3.76% (answer for Part 3)