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5 June, 05:04

A 10-year maturity, 8% coupon bond paying coupons semiannually is callable in five years at a call price of $950. The bond currently sells at a yield to maturity of 7.5% (3.8% per half-year). a. What is the yield to call annually?

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  1. 5 June, 05:14
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    6.76% annually

    Explanation:

    The rate of return bondholders receives on a callable bond until the call date is called Yield to call.

    Yield to Call = [ C + (F - P) / n ] / [ (F + P) / 2 ]

    It is assumed that face value of Bond is $1,000

    C = Coupon Payment = $1,000 x 3.8% = $38

    F = Face value = $1,000

    P = Call price = $950

    n - = number of periods to call = 5 x 2 = 10 periods

    Yield to Call = [ $38 + ($1,000 - $950) / 10 ] / [ ($1,000 + $950) / 2 ]

    Yield to Call = [ $38 - 5 ] / $975 = $33 / $975 = 0.0338 = 3.38% semiannually

    YTC = 3.38% semiannually = 6.76% annually
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