A company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $104 per $100 of face value. What is the yield to maturity of this bond when it is released

Yield to maturity = 1.96% (approx.)

Explanation:

Yield to maturity (YTM):

Yield to maturity measures the annual return an investor would receive if he or she held a particular bond until maturity.

Formula:

Yield to maturity = {Coupon + (Face Value - Present Value or call price) / Years till call } / { (face value + Present Value or call price) / 2}

As the company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments so

per face value = $100.

Years to maturity = 10 years.

Coupon rate = 6%.

Annual coupon payment = 0.6 * 100 = $6

As on release, it has a price of $104 per $100 of face value so

Present value of bond = $104

Future value is = $100

As the bond can be called at par in one year after release or any time after that on a coupon payment date.

Therefore by putting the values in the above formula, we get

Yield to maturity = {6 + (100 - 104) / 1 } / { (100 + 104) / 2}

Yield to maturity = 1.96% (approx.)