Question

A 10-year corporate bond has a 6 percent coupon, a call premium of $60, and a first call date in year 4. Market interest rates are 6.5 percent and are expected to rise for an extended period. If you plan to hold the bond, which yield should you most consider before buying the bond

Answer 1

YTC = 8.3%

Step-by-step explanation:

you should calculate the yield to call (YTC)

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

but we first need to calculate the market value:

PV of face value = $1,000 / (1 + 6.5%)¹⁰ = $532.73

PV of coupons = $60 x 7.18883 (PV annuity factor, 6.5%, 10 periods) = $431.33

market price = $532.73 + $431.33 = $964.06

YTC = {60 + [(1,060 - 964.06)/4]} / [(1,060 + 964.06)/2] = 83.985 / 1,012.03 = 8.3%