Question

Pawleys Inc.'s bonds currently sell for $1,264 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 4 years at $1,170. What is their yield-to-call (YTC)?

a) 8.12%

b) 7.35%

c) 6.62%

d) 6.98%

e) 7.74%

Answer 1

To calculate the yield-to-call (YTC), we need to find the discount rate that makes the present value of the bond's future cash flows equal to its current market price, assuming the bond is called in 4 years. We can use the following formula to calculate YTC:

PV = C/(1 + r)^1 + C/(1 + r)^2 + ... + C/(1 + r)^n + M/(1 + r)^n

Where PV is the current market price of the bond, C is the annual coupon payment, r is the yield-to-call, n is the number of years until the bond is called, and M is the call price.

In this case, the bond is selling for $1,264, the annual coupon payment is $105, the bond will be called in 4 years at a price of $1,170, and the maturity is 15 years. Therefore:

PV = $1,264
C = $105
n = 4
M = $1,170

Using a financial calculator or spreadsheet software, we can solve for YTC, which is approximately 8.12%.

Therefore, the answer is (a) 8.12%.