An 8 coupon bond 1000 par value annual payments 10 years to

An 8% coupon bond, $1,000 par value, annual payments, 10 years to maturity is callable in 7 years at a call price of $1,200. If the bond is selling today for $900, the yield to call is closest to

Solution

Yield to call = Average Income/Average Investment = ((Coupon+(Call price-Current Selling price)/Years to call)/((Current Selling price+Call price)/2) = ((80+(1200-900)/7)/((1200+900)/2)) = 11.70% Working: Annual coupon = Par Value x Coupon rate = $       1,000 x 8% = $             80