The yield to call (YTC) is the rate of return earned on a bond when it is called before its maturity date. The equation for solving for the YTC is shown below: N Price of callable bond => INT t=1 (1+ra) Call price + (1+ra)N Calculate YTC using a financial calculator by entering the number of payment periods until call for N, the price of the bond for PV, the interest payments for PMT, and the call price for FV. Then you can solve for I/YR = YTC. Again, remember you need to make the appropriate adjustments for a semiannual bond and realize that the calculated I/YR is on a periodic basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and FV are identical and the opposite sign is used for PV; otherwise, your answer will be incorrect. A company is more likely to call its bonds if they are able to replace their current high-coupon debt with less expensive financing. A bond is more likely to be called if its price is above v par-because this means that the going market interest rate is less than its coupon rate. Quantitative Problem: Ace Products has bond issue outstanding with 15 years remaining to maturity, a coupon rate of 8.8% with semiannual payments of $44, and a par value of $1,000. The price of each bond in the issue is $1,200.00. The bond issue is callable in 5 years at a call price of $1,088. What is the bond's current yield? Round your answer to two decimal places. Do not round intermediate calculations. 7.63 % Hide Feedback Partially Correct Check My Work Feedback Realize that the bond is a semiannual bond; however, this doesn't impact the current yield calculation. Review the formula for calculating a bond's current yield. Realize that the bond is selling above par, so it is a premium bond; therefore, its current yield will be less than its coupon rate. What is the bond's nominal annual yield to maturity (YTM)? Round your answer to two decimal places. Do not round intermediate calculations. 7.04 % What is the bond's nominal annual yield to maturity (YTM)? Round your answer to two decimal places. Do not round intermediate calculations. 7.04 % Show All Feedback What is the bond's nominal annual yield to call (YTC)? Round your answer to two decimal places. Do not round intermediate calculations. 6.31 % Show All Feedback Assuming interest rates remain at current levels, will the bond issue be called? The firm should call the bond. Hide Feedback
