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Jerome Corp. bonds have 15 years to maturity an 8.75% coupon paid semi-annually and a $1,000...

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?

Solutions

Expert Solution

                  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

jeff jeffy answered 1 year ago
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