Carson Health Plans issued a 5 percent annual coupon bond a few years ago. The bond now sells for $4,800. The bond has a call provision that allows Regal to call the bond in twelve years for a call premium of $500. The par value of the bond is $5000. a. What is the bond's yield to maturity? Assume the bond is held to maturity 50 years from now. b. What is the bond's yield to call? Assume the bond is held to the call date 12 years from now. ANSWER The yield to maturity (YTM) is based on the assumption that the bond will be held to maturity, 5 at which time the investor will receive the par value: 7 3 Years to maturity Annual coupon payment O Current price Par value 2 Yidd to maturity 3 nper pmt Years to maturity Annual coupon payment Current price Par value + call premium Yield to call pv fv rate b. The yield to call (YTC) is based on the assumption that the bond will be held to the call date, at which time the investor will receive the call price: nper pmt pv fv rate If investors expect a call, and the premium bond price indicates that interest rates have fallen, the bond will be valued on the basis of the call date rather than on its maturity.