Question

The $1,000 face value Orient bond has a coupon rate of 9%, with interest paid semiannually, and matures in 9 years. The bond current price is $856. The bond can be called in 3 years. The call premium on the bond is 7% of par. a) What is the bond's yield to maturity (YTM)? b) What is the bond’s yield to call (YTC)? c) Would an investor be more likely to earn the YTM or the YTC? Explain

Answer 1

Solution :-

(A)

Given Face Value of Bond (FV)= $1,000

Semiannual Coupon Amount = $1,000 * 9% * 6 / 12 = $45

Bond Price ( PV ) = $856

Time to Maturity = 9 Years

As Semiannual ( n ) = 9 * 2 = 18

Now Semiannual Yield to Maturity = 5.81%

Now Annual YTM = 5.81% * 2 = 11.62%

(b)

Given Face Called Price (FV)= $1,000 * ( 1 + 0.07 ) = $1070

Semiannual Coupon Amount = $1,000 * 9% * 6 / 12 = $45

Bond Price ( PV ) = $856

Time to Call = 3 Years

(n) = 3 * 2 = 6

Now Yield to Call (YTC ) =

Now Semiannual YTC = 8.61%

Annual Yield to Call ( YTC ) = 8.61% * 2 = 17.22%

(C) Investor would more likely to earn Yield to Call, As we see Yield to Call is much higher as compared to Yield to Maturity

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