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3. The price of a 20 year, 12% bond is $875. There is an option, and...

3. The price of a 20 year, 12% bond is $875. There is an option, and the firm may purchase the bond back in 4 years. Derive the yield to maturity and the yield to call. call price is 1050

Please show word and explain the process

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Answer #1

1: YTM

Using financial calculator

Input: FV= 1000

PV = -875

N=20

PMT =12%*1000 = 120

Solve for I/Y = 13.87

Hence YTM is 13.87%

2: YTC

Using financial calculator

Input: FV= 1050

PV = -875

N=4

PMT =12%*1000 = 120

Solve for I/Y = 17.57

Hence YTM is 17.57%

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