Question

Schumacher Homes has 8 percent bonds outstanding that mature in 13 years. The bonds pay interest semiannually. These bonds have a par value of $1,000 and are callable in 2 years at a premium of $75. What is the yield to call if the current price is equal to 103.25 percent of par?

		9.66 percent
		7.75 percent
		8.98 percent
		8.06 percent

Answer 1

Face(Par) Value = $1000

Semi-annual coupon payment = $1000*8%*1/2 = $40

No of years to call = 2

n = 2*2 = 4

Redemable value at Call = $ 1000 + $ 75

= $ 1075

Price = $1000*103.25%

= $ 1032.5

To calculate the Yield to call(YTC) we eill use Trial and Error method, First we take YTC as 10%

Semi-annual YTC = 10%/2 = 5%

Price = $ 141.84+ $884.41

Price = $ 1026.25

Now, since the price at YTC 10% is smaller & closer than the current price, we will take a little smaller YTC as 9%

Semi-annual YTC = 9%/2 = 4.5%

Price = $ 143.50 + $901.45

Price = $ 1044.95

Now calculating the YTC,

YTC = 9.66% (approx)

So, this bond’s yield to call is 9.66%

hence, Option A

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