Question

The XYZ company sells bonds for $1,300. These bonds have a coupon rate of 11% and a 15 year maturity. Par value is $1,000. They can be called in 3 years at $1110. a. Find YTM b. Find YTC c. Are the bonds likely to be called? Explain.

Answer 1

K = N

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

k=1

K =15

1300 =∑ [(11*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^15

k=1

YTM% = 7.58

K = Time to call

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

k=1

K =3

1300 =∑ [(11*1110/100)/(1 + YTC/100)^k]     +   1110/(1 + YTC/100)^3

k=1

YTC% = 4.74

Not likely to be called as yield by calling is lesser than not by calling