A Corporate Bond with 10% Coupon Rate and remaining maturity of 6 years is curre

Question

A Corporate Bond with 10% Coupon Rate and remaining maturity of 6 years is currently selling for $ 1,130. This is a Callable Bond in 2 years time. If called the issuer will pay the face value of Bond, $1,000, plus 10% of the face value. Your best friend wants to buy this Bond and plans to hold it for 3 years at the end of which he would sell it for $1,050. Various calculated Bond Yields are listed as Answer along with name of each type of yield as questions.

Yield to Maturity (YTM)=?
Yield to Call (YTC)=?
Yield to Holding Period (YTH)=?
Curr Yield =?

Explanation / Answer

We have Face Value FV=$1000, COupon =10%, So PMT =10%*$1000=$100 Maturity nper = 6Yrs, Present value PV =$1130 So YTM = Rate(nper,PMT,PV,FV) = Rate(6,100,-1130,1000) = 7.25% If Bond is called in 2Yrs, we have PV=1130, FV=1000+10%*1000 = 1100, PMT=100, nper=2 SO YTC =Rate(nper,PMT,PV,FV) = Rate(2,100,-1130,1100) = 7.57% If Bond is held for 3 yrs, we have PV=1130, FV=1050, PMT=100, nper=3 SO YTH =Rate(nper,PMT,PV,FV) = Rate(3,100,-1130,1050) = 6.64% CUrrent Yield = Current PMT/Current price = 100/1130 = 8.85%

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