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Homework answers / question archive / A $1000 face value bond with a 20-year maturity and 9% semiannual coupon rate is callable in 10 years at a call price of $1,050
A $1000 face value bond with a 20-year maturity and 9% semiannual coupon rate is callable in 10 years at a call price of $1,050. The bond currently sells at a yield to maturity of 8%, what is the yield to call?
We can calculate the price of bond by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of bond
Rate = 8%/2 = 4% (semiannual)
Nper = 20*2 = 40 periods (semiannual)
Pmt = Coupon payment = $1,000*9%/2 = $45
FV = $1,000
Substituting the values in formula:
= -pv(4%,40,45,1000)
= $1,098.96
We can calculate the yield to call by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to call (semiannual)
Nper = 10*2 = 20 periods (semiannual)
Pmt = Coupon payment = $1,000*9%/2 = $45
PV = $1,098.96
FV = Call price = $1,050
Substituting the values in formula:
= rate(20,45,-1098.96,1050)
= 3.94%
Yield to call = Rate * 2
= 3.94% * 2
= 7.89%
