Question

Last year Darlington Equipment Company issues a 10-year, 12% coupon bond at its par value of $1000. Interest is paid quarterly. Currently the bond sells for $1,200.

a. What is the bonds yield to maturity?

b. If the bond can be called in 5 years for a redemption price of $1,165, what is the bond's yield to call?

Please show your work :)

Answer 1

K = Nx4

Bond Price =∑ [(Quarterly Coupon)/(1 + YTM/4)^k]     +   Par value/(1 + YTM/4)^Nx4

k=1

K =10x4

1200 =∑ [(12*1000/400)/(1 + YTM/400)^k]     +   1000/(1 + YTM/400)^10x4

k=1

YTM% = 8.95

K = Time to callx4

Bond Price =∑ [(Quarterly Coupon)/(1 + YTC/4)^k]     +   Call Price/(1 + YTC/4)^Time to callx4

k=1

K =5x4

1200 =∑ [(12*1165/400)/(1 + YTC/400)^k]     +   1165/(1 + YTC/400)^5x4

k=1

YTC% = 11.21