Question

Arco industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 8.40% yield to maturity. But it can be called in 6 years at a price of $1,045. What is the bonds yield to call?

Answer 1

VALUE OF BOND	INTEREST*PVAF AT 4.20% FOR 30 SEMIANNUAL PERIOD + FACE VALUE*pvf AT 4.20% AT 30TH SEMIANNUAL PERIOD	(41.25*16.87975) + (1000*.291052)	987.3417
Interest	41.25
face value	1000
PVAF at 4.20%	1-(1+r)^-n /r	1-(1.042)^-30 /.042	.708949/.042	16.87975
PVF at 4.20 at 30th semiannual period	1/(1+r)^n	1/(1.042)^30		0.291051
Yield to call (semiannual)	using rate function in M S excel =rate(nper,pmt,pv,fv,type) nper = 6*2 =12 pmt = 41.25 pv = -987.3417 fv =1045	rate(12,41.25,-987.34,1045,0)	4.55%
Annual Yield to call	4.55*2	9.10%
Approximate YTM	interest+(call value-market value of bond)/Years to call / (call value+market value)/2	41.25+(1045-987.3417)/12 / (1045+987.3417)/2	46.0548/1016.171	4.53%
Approximate Annual Yield to call	4.53*2	9.06%