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22 April, 03:13

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bonds nominal yield to call? Select one: a. 5.01% b. 5.27% c. 5.54% d. 5.81% e. 6.10%

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  1. 22 April, 03:20
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    b. 5.27%

    Explanation:

    First, find the PV of the bond today. With a financial calculator, input the following and adjust the variables to semi-annual basis;

    Face value; FV = 1000

    Maturity of bond; N = 15*2 = 30

    Semiannual coupon payment = (8.75%/2) * 1000 = 43.75

    Semi annual interest rate; I/Y = 3.25%

    then compute Price; CPT PV = 1,213.547

    Next, with the PV, compute the yield to call (I/Y) given 6 years;

    Maturity of bond; N = 6*2 = 12

    Semiannual coupon payment = (8.75%/2) * 1000 = 43.75

    Price; PV = - 1,213.547

    Face value; FV = 1,050

    then compute Semiannual interest rate; CPT I/Y = 2.636%

    Convert the semiannual rate to annual yield to call = 2.636*2 = 5.27%
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