Question

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,190. What is the bond’s nominal yield to call?

Answer 1

Given the following information,

Number of compounding periods = semi annual = 2

Maturity in years = 15

Number of payments NPER = Maturity in years*Number of compounding periods = 15*2 = 30

Face value = 1000

Coupon rate = 8.25% = 0.0825

Coupon payment = PMT = (coupon rate*face value)/ number of compounding periods

Coupon payment = PMT = (0.0825*1000)/ 2

Coupon payment = PMT = (82.5)/ 2 = 41.25

YTM = 6.50% = 0.065

rate per period = RATE = 0.065/2 = 0.0325

Calculation of current price of the bond using excel,

Thus current price of the bond is $1166

Step 2:

Given

Time to call = 6 years

Number of time periods to call = 6*2 = 12

Call price = 1190

Calculation of bond's YTC, using excel

Therefore, the bonds nominal yield to call is 7.35%