Question

1. A corporate bond has 20 years to maturity, par value of $1,000, and pays interest semiannually. The quoted coupon rate is 8%, and the bond is priced at $950. The bond is callable in 10 years at 105% of par.

A. What is the bond's yield to call?

B. What is the bond's yield to maturity?

Answer 1

A

K = Time to callx2

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

k=1

K =10x2

950 =∑ [(8*1000/200)/(1 + YTC/200)^k]     +   1050/(1 + YTC/200)^10x2

k=1

YTC% = 9.09

B

K = Nx2

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

k=1

K =20x2

950 =∑ [(8*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^20x2

k=1

YTM% = 8.53