7. Regal Health Plans issued a 12 percent annual coupon bond with a $1,000 par value a few years ago. The bond now has ten years remaining to maturity and sells for $1,100. The bond has a call provision that allows Regal to call the bond in four years at a price of $1,060

What is the bond's yield to maturity? Hint: Beware of superfluous information - answer the question that is being asked.

Choice: 9.00%

Choice: 9.87%

Choice: 10.35%

Choice: 11.28%

a) 10.35% b) 10.13%

the b. What is the bond's yield to call?

Explanation:

a) K = N

Bond Price = ∑ [ (Annual Coupon) / (1 + YTM) ^k] + Par value / (1 + YTM) ^N

k=1

K = 10

1100 = ∑ [ (12*1000/100) / (1 + YTM/100) ^k] + 1000 / (1 + YTM/100) ^10

k=1

yield to maturity% = 10.35

b) K = Time to call

Bond Price = ∑ [ (Annual Coupon) / (1 + YTC) ^k] + Call Price / (1 + YTC) ^Time to call

k=1

K = 4

1100 = ∑ [ (12*1000/100) / (1 + YTC/100) ^k] + 1060 / (1 + YTC/100) ^4

k=1

Yield to call % = 10.13