Question

2. Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,120. What is the bond’s nominal yield to call?

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =15x2

Bond Price =∑ [(8.25*1000/200)/(1 + 6.5/200)^k]     +   1000/(1 + 6.5/200)^15x2

k=1

Bond Price = 1166.09

K = Time to callx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTC/2)^k]     +   Call Price/(1 + YTC/2)^Time to callx2

k=1

K =6x2

1166.09177733666 =∑ [(8.25*1000/200)/(1 + YTC/200)^k]     +   1120/(1 + YTC/200)^6x2

k=1

YTC% = 6.53