Suppose that you have a bond that is currently trading for 1,234.56, has just pa

Question

Suppose that you have a bond that is currently trading for 1,234.56, has just paid its coupon, has a time-to-maturity of   14 years, pays semi-annual coupon payments of $35.50, and a face value of $1,000. This bond is unique in that the issuing firm has the right, but not obligation to call the bond in 10 years with a 14% call premium. What is this bond's yield-to-call that you would see reported in the financial press (i.e. not the effective yield)?

5.01%

5.16%

5.21%

5.38%

5.01%

5.16%

5.21%

5.38%

Explanation / Answer

Answer is B - 5.16%

Now here we know that Present value = 1234.56 , Future value = 1140 (1000 + 14% premium)

n= 20 ( 10 years x 2 since twice a year payment of coupon) , PMT = 35.50 (coupon rate)

now Use following format to calculate Yield in excel

=Rate ( n,PMT, -PV,FV) *2

= Rate (20,35.5,-1234.56,1140) *2

= 5.16%

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