Question

Sadik Inc.'s bonds currently sell for $1,250 and have a par value of $1,000. They pay a $115 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,115. What is their yield to call (YTC)? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Answer 1

In order to compute yield to call we have to assume that the bond matures in 5 years rather than 15 years. Call price is the principal at maturity.

Current bond price and YTC are related as:

P = C x [1-(1+YTC) ^‑t/YTC] + CP/ (1+YTC) ^t

P = Current bond price = $ 1,250

C = Annual coupon payment = $ 115

CP = Call price = $ 1,115

YTC = Yield to call on the bond

t = Time to call = 5 years

We can Compute IRR of investment using excel sheet which is YTC of the bond.

	A	B
1	Year	Cash Flow
2	0	-$ 1,250
3	1	$ 115
4	2	$ 115
5	3	$ 115
6	4	$ 115
7	5	*$ 1,230
8	IRR	7.33%

* 1,230 = $ 115 + $ 1,115

Considering the above table as excel sheet, use formula “=IRR(B2:B7) in cell B8 to get IRR as 7.33 %.

Hence yield to call of the bond is 7.33 %