A 6.75 percent coupon bond with 26 years left to maturity can be called in six years. The call premium is one year of coupon payments. It is offered for sale at $1,135.25. What is the yield to call of the bond? (Assume interest payments are semiannual.)

The yield to call is 5.07%

Explanation:

The yield to call can be computed using the rate formula in excel, which is given as : =rate (nper, pmt,-pv, fv)

nper is the number of years to call which is 6 years

pmt is the annual interest coupon payable by the bond, which is : 6.75%*$1000=$67.5

The pv is the current price at which the bond is offered to investors. i. e $1,135.25

fv is the price at the bond would be called in six years i. e par value+premium

par value is $1000

premium is $67.5

call price is $1067.5

=rate (6,67.5,-1135.25,1067.5)

rate=5.07%