$7-12$ YIELD TO CALL It is now January $1,2012,$ and you are considering the purchase of an

outstanding bond that was issued on January $1,2010.$ It has a $9\mathrm{.}5\%$ annual coupon and had

a $30-$year original maturity. $($It matures on December $31,2039.)$ There is $5$ years of call

protection $($until December $31,2014),$ 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 $116\mathrm{.}575\%$ of par, or $$1,165\mathrm{.}75.$

a$.$ What is the yield to maturity? What is the yield to call?

b$.$ If you bought this bond, which return would you actually earn? Explain your

reasoning.

c$.$ Suppose the bond had been selling at a discount rather than a premium. Would the

yield to maturity have been the most likely return, or would the yield to call have been

most likely?