N = the number of years until the company can call the bond Call price = the price the company must pay in order to call the bond (it is often set equal to the par value plus 1 year's interest rd = YTC The YTC is the rate of return investors will receive if their bonds are called. If the issuer has the right to call the bonds and if interest rate fall, then it would be logical for the issuer to call the bonds and replace them with new bonds that carry a lower coupon. The YTC is find similarly to the YTM. The same formula is used, but years to maturity are replaced with years to call, and the maturity value is replaced with the call price. Example: (Tool Kit 4 Chapter) Suppose you purchase a 15-year, 10% annual coupon, $ 1.000 par value bond with a call provision after 10 years at a call price of $ 1.100. One year later, interest rates have fallen from 10% to 5% causing the value of the bond to rise to $ 1.494,93. What is the bond's YTC? Call price =$ 1,100 rk=10% INT= $ 100 N=10-1=9 (years to call) VB=$ 1,494.93 rd/YTC=? VB Call price YTC rk So, YTC has to be less than a coupon rate, meaning less than 10%. rd 1=5% P1= 100 ∙ ( %, ) + 1,100 ∙ ( %, ) = 100 ∙ 7,10782 + 1,100 ∙ 0,64461 = 1,419. 853 1.419,853 1,494.93 P1 P 5% is too high rate rd 2=4% P2= 100 …show more content…
The bonds have face value of $1.000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is the current yield? Exercise: 9 A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a YTM of 10.5883%. The bonds pay coupons semiannually. What is the bond's current yield? Exercise: 10 A 10 year, 12% semiannually coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060. The bond sells for $ 1,100. Assume that the bond has just been issued. a) what is the bond's yield to maturity? b) what is the bond's current yield? c) what is the bond's capital gain or loss yield d) what is the bonds' yield to call?