Question

"A 6% corporate bond with 15 years left to maturity is currently trading at 115. The bond is callable in 5 years at 105. If a client buys the bond and then the issuer calls it in 5 years, the yield to call will be:"

Answer 1

Answer:

YTC = 3.72%

Explanation:

YTC = {coupon + [(call value - market value)/n]} / [(call value + market value)/2]

• coupon = $1,000 x 6% = $60
• n = 5 years
• call value = 105% x $1,000 = $1,050
• market value = 115% x $1,000 = $1,150

YTC = {$60 + [($1,050 - $1,150)/5]} / [($1,000 + $1,150)/2]

YTC = ($60 - $20) / $1,075 = 0.0372 x 100 = 3.72%