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Yield to Call

It is now January 1, 2009, and you are considering the purchase of an outstanding bond that was issued on January 1, 2007. It has a 9.5% annual coupon and had a30-year original maturity. (It matures on December 31, 2036) There is 5 years of call protection (until December 31, 2011), after which time it can be called at 109 –that is a 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 116.575% of par, or $1,165.75


a. What is the YTM? What is the YTC?

b. If you bought this bond, which return would you actually earn? Explain?

c. Suppose the bond is selling at a discount rather than a premium. Would the YTM have bee the most likely return, or would the YTC have been most likely?
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Answer #1
C= 95
F 1000
P 1165.75
n 30
YTM= 95+((1000-1165.75)/30)
89.475
(1000+1165.75)/2
1082.875
YTM= 8.26%
YTC= ((95+(1090-1165.75)/5))
79.85
(1090+1165.75)/2
1127.875
7.08% (79.85/1127.875)*100
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