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A 10-year bond that pays coupon semi-annually at a coupon rate of 9% is priced at $ 900 at its issuance. What is the Yield to Maturity of the Bond? If it is called back 3-years after the issuance will a call premium of 5%. What is its Yield to Call? (12 points)

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jepessoa

Answer:

YTM = 10.53%

YTC = 14.36%

Explanation:

the yield to maturity (YTC) formula is:

YTM = {coupon + [(face value - market value)/n]} / [(face value + market value)/2]

YTM = {$45 + [($1,000 - $900)/20]} / [($1,000 + $900)/2] = $50 / $950 = 5.26 x 2 coupons per year = 10.53%

the yield to call (YTC) formula is:

YTC = {$45 + [($1,050 - $900)/6]} / [($1,050 + $900)/2] = $70 / $975 = 7.179 x 2 = 14.36%