A 3% annual coupon, 10 year maturity, semi-annual coupon payment, $1000 face value, 4% yield to maturity bond is callable in 7 years with a call premium of $1,100. What is the yield to call for this bond? Express your answer in decimal format (e.g., input 0.0329 for 3.29%)

Answer rating: 100% (QA)

To calculate the yield to call YTC for the bond we first need to understand what the yield to call represents The yield to call is the rate of return an investor would receive if the bond is called by the issuer before its maturity date assuming the investor holds the bond until the call date and receives the call price Given Coupon rate annual 3 Maturity 10 years Semiannual coupon payment Face value 1000 Yield to maturity YTM 4 Call price 1100 Call date 7 years To calculate the yield to call we will need to find the yield that equates the present value of the bonds future cash flows to its current price including the call premium Lets set up the calculation 1 Calculate the semiannual coupon payment Coupon payment Coupon rate Face value 2 3 1000 2 30 2 Calculate the number of periods until call date Number of periods Years to call date 2 since its semiannual 7 2 14 periods 3 Calculate the present value of coupon payments until call date PV of coupons Coupon payment 1 1 rn r 30 1 1 r14 r 4 Calculate the present value of the face value PV of face value Face value 1 rn 1000 1 r14 5 Calculate the present value of the call price PV of call price Call price 1 rn 1100 1 r14 6 The total present value will be the sum of the present values of coupons face value and call price 7 Set up the equation and solve for the yield to call r ... View the full answer