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Homework answers / question archive / Funny Industries has a bond outstanding with 20 years to maturity, a 5
Funny Industries has a bond outstanding with 20 years to maturity, a 5.2% coupon paid semiannually, and a $1,000 par value. The bond has a 4.5% nominal yield to maturity, but it can be called in 5 years at a price of $1,045. What is the bond's nominal yield to call?
a. 1.75%
b. 1.99%
c. 2.60%
d. 3.50%
e. 3.98%
First we calculate Price of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of Bonds = ?
Rate = 4.5%/2 = 2.25%
Nper = 20 years * 2 = 40 Periods
PMT = $1,000*5.2%/2 = $26
FV = $1,000
Substituting the values in formula:
=-pv(2.25%,40,26,1000)
PV or Price of Bond = $1,091.68
Now we calculate Yield to Call using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)*2
Here,
Rate = Yield to Call = ?
Nper = 5 years *2 = 10 Periods
PMT = $1,000*5.2%/2 = $26
PV = $1,091.68
FV = $1,045
Substituting the values in formula:
=rate(10,26,-1091.68,1045)*2
Rate or Yield to Call = 3.98%
So, the correct option is E "3.98%".
