Question

SKMY Industries has a bond outstanding with 20 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 7.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,055. What is the bond’s nominal yield to call?

Answer 1

Bond’s nominal yield to call is 6.67%

Working:

Step-1:Calculation of current price of bond
	Current Price		=	=-pv(rate,nper,pmt,fv)
			=	$ 1,077.07
	Where,
	rate	Yield to maturity		=	7.50%/2		=	0.0375
	nper	Number of period		=	20*2		=	40
	pmt	Coupon Payment		=	1000*8.25%*6/12		=	$       41.25
	fv	Face Value					=	$       1,000
Step-2:Calculation of yield to call
Yield to call is the yield earned by investor when investment is hold till the period of call.
Yield to call		=	=RATE(nper,pmt,-pv,fv)*2
		=	6.67%
Where,
nper	Number of period to call						=	12
pmt	coupon payment			=	1000*8.25%*6/12		=	$       41.25
pv	Current price			=			=	$ 1,077.07
fv	Face value			=			=	$ 1,000.00