Question

A 10 percent coupon bond has 15 years to maturity and could be called in two years. If the bond is called, investors will earn 4 percent. The call premium is one year of coupon payments. If coupon payments are made annually and par value is $1,000, what is the bond's yield to maturity? Multiple Choice A.) 6.19 percent B.) 6.82 percent C.) 7.65 percent D.) 7.98 percent

Answer 1

Call Price = 1,000 + 100 = $1,100

Calculating Bond Price,

Using TVM Calculation,

PV = [FV = 1,100, PMT = 100, N = 2, I = 0.04]

PV = $1,205.62

Calculating Yield to Maturity,

Using TVM Calculation,

I = [PV = -1,205.62, PMT = 100, FV = 1,000, N = 15]

I = 7.65%

Yield to Maturity = 7.65%