Question

3. A 7-year, $1,000 par bond has an 8% annual coupon and is currently vielding 7.5%. The bondcom be called in 3 years at a call price of $1,010. What is the bond yielding, assuming it will be called (known as the yield to call)? (10 points)

Answer 1

Par value of Bond (FV) = $1,000

Annual Coupon (A) = 8%*1,000 = $80

Years until maturity = 8

Current YTM = 7.5%

Firstly, we need to calculate the Current Price of Bond (PV)

$PV = 80*(P/A,0.075,7)+1000*(P/F,0.075,7)$

by solving

$PV = \$1,026.48$

Call Price = $1,010

Call Period = 3 years

Yield to call = ytc

$1026.48 = 80*(P/A,ytc,3)+1010*(P/F,ytc,3)$

by trail and error method,

$\bg_green \large ytc = 7.30\%$

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.