Atlantis Fisheries issues zero coupon bonds on the market at a price of $484 per

Question

Atlantis Fisheries issues zero coupon bonds on the market at a price of $484 per bond. Each bond has a face value of $1,000 payable at maturity in 10 years. It is callable in 5 years at a call price of $620. Using semiannual compounding, what is the yield to call for these bonds?

Atlantis Fisheries issues zero coupon bonds on the market at a price of $484 per bond. Each bond has a face value of $1,000 payable at maturity in 10 years. It is callable in 5 years at a call price of $620. Using semiannual compounding, what is the yield to call for these bonds?

Explanation / Answer

We are given:

Market price (PV) = 484

N = 5 x2 = 10

Call price (FV) = 620

This is a zero coupon bond, so there is no coupon payment, therefore we can apply simple Future value of $1 formula:

FV = PV ( 1+r)^n

620 =484 x (1+r)^10

Dividing both sides by 484 and solving, we get:

1.02507 = 1+r

r= 2.507%

r is semiannual yied to call.

Annual yield to call = 2.507% x 2

= 5.014%

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