Question

Essentials of Investments- Bodie, Kane and Marcus.

PLEASE WITHOUT EXCEL and WITHOUT FINANCIAL CALCULATOR! And PLEASE do not abbreviate the process! If you need to calculate the cash flows or the present value, please clarify and step by step without abbreviating the process. I mean do not write like this: "32.5 x PVIFA @ 3%, 10 years" or like this: "= 32.5 / 1.06 ^ 0.5 .... 1032.5 / 1.06 ^ 20 = 1057.79" . I NEED TO SEE THE PROCEDURE. STEP BY STEP. SHOW FORMULAS, SHOW EVERYTHING. DO NOT ABBREVIATE THE PROCESS.

1. A 20-year bond with a 6.5% semiannual coupon has a 5-year call option with a call price of $ 1010. Currently the bond is sold with a YTM of 6%.

a. What is the YTC?
b. What would be the YTC if the exercise price were $ 960?
c. What would be the YTC if the exercise price were $ 960 but the bond was called in 2 years?

Answer 1

a) calculation of yield to call (YTC)
Interest (1000*0.065)	65
Face value(assumed)	$1000
Call price	$1010
Years to call	5
Yield to call=	Interest+ (Face value-Call price)/years to call
	(face value + call price)/2
	65+(1000-1010)/5
	(1000+1010)/2
Yield to call=	6.27%
Therefore YTC is 6.27%
b) calculation of yield to call (YTC)
Interest (1000*0.065)	65
Face value(assumed)	$1000
Call price	$960
Years to call	5
Yield to call=	Interest+ (Face value-Call price)/years to call
	(face value + call price)/2
	65+(1000-960)/5
	(1000+960)/2
Yield to call=	7.45%
Therefore YTC is 7.45%
c) calculation of yield to call(YTC)
Interest (1000*0.065)	65
Face value(assumed)	$1000
Call price	$960
Years to call	2
Yield to call=	Interest+ (Face value-Call price)/years to call
	(face value + call price)/2
	65+(1000-960)/2
	(1000+960)/2
Yield to call=	8.67%
Therefore YTC is 8.67%