Meacham Enterprises' bonds currently sell for $1,280 and have a per value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC) ?

Select one:

a. 6.39%

b. 7.08%

c. 7.45%

d. 6.72%

e. 7.82%

c. 7.45%

Explanation:

The yield to call is the rate of return that a bondholder earns when he holds a callable bond until the call date.

With a financial calculator, you can solve this question using the following inputs;

Total duration to the bond being called; N = 5

Price of the bond; PV = - 1,280

Annual coupon payment; PMT = 135

The call value at year 5 will be the Face value at that time hence FV = 1,050

Compute the rate; CPT I/Y = 7.45%

Therefore, the Yield to Call (YTC) is 7.45%