Question

Jerome Corp. bonds have

15 years to maturity

an 8.75% coupon paid semi-annually

and a $1,000 par value.

The bond has a 6.50% yield to maturity, but it can be called in 6 years at a price of $1,050.

What is the bond's market price?

What is the bond's 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 =∑ [(8.75*1000/200)/(1 + 6.5/200)^k]     +   1000/(1 + 6.5/200)^15x2

k=1

Bond Price = 1213.55

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

1213.55 =∑ [(8.75*1000/200)/(1 + YTC/200)^k]     +   1050/(1 + YTC/200)^6x2

k=1

YTC% = 5.27