Question

ABC Inc. recently issued $1,000 par bonds at a 8.40% coupon rate. The bonds have 18 years to maturity and the current price is $1,099. If the call price is $1,150 and the bond can be called in 12 years, what is the yield to call? Assume semi-annual compounding.

Note: Convert your answer to percentage and round off to two decimal points. Do not enter % in the answer box.

Answer 1

Answer 2

To calculate the yield to call, we need to use the yield to call formula and solve for the required yield rate:

Yield to Call = [(Annual Interest + (Call Price - Current Price) / Years to Call) / (Call Price + Current Price) / 2] * 100

Where: Annual Interest = Coupon Rate * Par Value / 2

In this case: Par Value = $1,000 Coupon Rate = 8.40% or 0.084 Current Price = $1,099 Call Price = $1,150 Years to Call = 12

First, let's calculate the annual interest: Annual Interest = 0.084 * $1,000 / 2 = $42

Next, we'll substitute the values into the formula and solve for the yield to call: Yield to Call = [(42 + (1,150 - 1,099) / 12) / (1,150 + 1,099) / 2] * 100 Yield to Call = [(42 + 51 / 12) / 2,249 / 2] * 100 Yield to Call = [42 + 4.25] / 1,124.5 * 100 Yield to Call = 46.25 / 1,124.5 * 100 Yield to Call ≈ 4.11

Therefore, the yield to call is approximately 4.11%