Question

Sadik Inc.'s bonds currently sell for $1,250 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)? PLEASE SHOW WORK

Answer 1

Using the approximate formula,

Yield to Call =[ Annual Interest + ( Call Price- Market Price ) / Number of Years to Call ]/ (Call Price + Market Price)/2

[ $ 105+ ( $ 1100- $ 1,250)/ 5] / [( $ 1,100+ $ 1,250)/ 2]*100

= 75/1175*100

= 6.38%

Since this formula gives an approximate value, the financial calculators can be used alternatively.

Using the financial calculators, Yield to call is calculated as under :

Face Value = $ 1000

Price = $ 1250

Coupon Rate = $ 105/ $ 1000*100

= 10.5%

Years to Maturity = 15

Call Price = $ 1100

Years to Call = 5 Years

Hence, Yield to Call =6.28 %

Answer : 6.28%