Question

consider a 20 year ,10% annual pay bond with a full price of ksh.112 and can be called n five years at ksh. 102 and can also be called at par in 7 years

required.
1.Yield to maturity
2.Yield to first call
3.Yield to second call

Answer 1

1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =20

112 =∑ [(10*100/100)/(1 + YTM/100)^k]     +   100/(1 + YTM/100)^20

k=1

YTM% = 8.71

2

K = Time to call

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTC)^k]     +   Call Price/(1 + YTC)^Time to call

k=1

K =5

112 =∑ [(10*100/100)/(1 + YTC/100)^k]     +   102/(1 + YTC/100)^5

k=1

YTC% = 7.39

3

K = Time to call

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTC)^k]     +   Call Price/(1 + YTC)^Time to call

k=1

K =7

112 =∑ [(10*100/100)/(1 + YTC/100)^k]     +   100/(1 + YTC/100)^7

k=1

YTC% = 7.72