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EXERCISE #6: A 5-year 6% annual coupon bond yields 4%. The bond is callable in one or two years at 102. What is the yield

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EXERCISE #6: A 5-year 6\% annual coupon bond yields 4%. The bond is callable in one or two years at 102. What is the yield to call? Solve the problem in stages. 1. Compute the price of the bond first. Assume face =$1000. P0=0 2. Draw the picture of the bond's cash flows assuming it will be called in one year. Compute the IRR on the cash flows ie, solve for y, use Excel's rate() or a financial calculator: P0=1+y$Coup+$CPrc 3. Draw the picture of the bond's cash flows assuming it will be called in two years. If the bond were callable in two years, the yield to call would be (solve, use Excel or calculator): EXERCISE #6: A 5-year 6\% annual coupon bond yields 4%. The bond is callable in one or two years at 102. What is the yield to call? Solve the problem in stages. 1. Compute the price of the bond first. Assume face =$1000. P0=0 2. Draw the picture of the bond's cash flows assuming it will be called in one year. Compute the IRR on the cash flows ie, solve for y, use Excel's rate() or a financial calculator: P0=1+y$Coup+$CPrc 3. Draw the picture of the bond's cash flows assuming it will be called in two years. If the bond were callable in two years, the yield to call would be (solve, use Excel or calculator)

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