Question

A 20-year bond with a coupon rate of 8% and par value of $1000 currently has a yield to maturity of 6%. The bond is callable in 5 years with a call price of $1100. What is the bond’s yield to call?

A zero-coupon bond with 10 years remaining until maturity and a par value of $1000 has a yield to maturity of 10%. What is the bond’s price?

(Financial calculator please)

Answer 1

Answer to Question 1:

Face Value = $1,000
Call Price = $1,100

Annual Coupon Rate = 8%
Annual Coupon = 8% * $1,000 = $80

Calculation of Current Price:

Time to Maturity = 20 years

Current Price = $80 * PVIFA(6.00%, 20) + $1,000 * PVIF(6.00%, 20)

Using financial calculator:
I = 6%
N = 20
PMT = 80
FV = 1000

PV = -1229.40

Current Price = $1,229.40

Calculation of Yield to Call:

Time to Call = 5 years

Let Annual YTC be i%

$1,229.40 = $80 * PVIFA(i%, 5) + $1,100 * PVIF(i%, 5)

Using financial calculator:
N = 5
PV = -1229.40
PMT = 80
FV = 1100

I = 4.59%

Annual YTC = 4.59%