A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at 1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is 1,000.)

Question

A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at 1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is  1,000.)

Accepted Answer

Step:1 ：Calculate the semiannual coupon payment: ( text{Coupon payment} = frac{7.25% times 1,000}{2} = 72.50 )Step:2 ：Calculate the total number of semiannual periods until the call date: ( 5 times 2 = 10 )Step:3 ：Calculate the call premium: ( text{Call premium} = 72.50 times 2 = 145 )Step:4 ：Calculate the future value at the call date: ( text{Future value} = 1,000 + 145 = 1,145 )Step:5 ：Calculate the present value of the bond&#x27;s cash flows: ( PV = sum_{n=1}^{10} frac{text{Coupon payment}}{(1 + r)^n} + frac{text{Future value at call date}}{(1 + r)^{10}} )Step:6 ：Solve for the yield to call ( r ): Find the value of ( r ) that makes the present value of the bond&#x27;s cash flows equal to 1,066.24

Answer

Step: 1 ：Calculate the semiannual coupon payment: ( text{Coupon payment} = frac{7.25% times 1,000}{2} = 72.50 )Step: 2 ：Calculate the total number of semiannual periods until the call date: ( 5 times 2 = 10 )Step: 3 ：Calculate the call premium: ( text{Call premium} = 72.50 times 2 = 145 )Step: 4 ：Calculate the future value at the call date: ( text{Future value} = 1,000 + 145 = 1,145 )Step: 5 ：Calculate the present value of the bond&#x27;s cash flows: ( PV = sum_{n=1}^{10} frac{text{Coupon payment}}{(1 + r)^n} + frac{text{Future value at call date}}{(1 + r)^{10}} )Step: 6 ：Solve for the yield to call ( r ): Find the value of ( r ) that makes the present value of the bond&#x27;s cash flows equal to 1,066.24

A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at $1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $$ 1, 000$ .)

Answer

Popular Problems

A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at $1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $1,000.)

Answer

Popular Problems

A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at $1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $$ 1, 000$ .)