Yield to call It is now January 1, 2014, and you are considering the purchase of
ID: 2646041 • Letter: Y
Question
Yield to call
It is now January 1, 2014, and you are considering the purchase of an outstanding bond that was issued on January 1, 2012. It has a 8.5% annual coupon and had a 15-year original maturity. (It matures on December 31, 2026.) There is 5 years of call protection (until December 31, 2016), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 111.545% of par, or $1,115.45.
What is the yield to maturity? Round your answer to two decimal places.
%
What is the yield to call? Round your answer to two decimal places.
%
Explanation / Answer
(a) Computation of the Yield to maturity(YTM).We have,
YTM = [Coupon rate + ( Market price - Face value)/ Number of years to maturity] / ( Market Value + Face Value)/2
YTM = [ 85 + ( 1,115.45 - 1,000)/ 15 ] / ( 1,115.45 + 1,000) / 2
YTM = [ 85 + 7.70] / 1,057.73 * 100
YTM = 8.76 %
Hence, Yield to maturity is 8.76 %.
(b) Computation of yield to call.We have,
Yield to Call = [ Coupon Interest + ( Call price - Market price) / Number of years to call ]/ ( Market price + Call price) /2
Yield to Call = [ 85 + ( 1,090 - 1,115.45)/5] / ( 1,090 + 1,115.45) / 2
Yield to call = [ 85 - 5.09 ] / 1,102.73 * 100
Yield to call = 7.25 %
Hence, Yield to Call is 7.25 %.
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