A 10-year maturity, 8% coupon bond paying coupons semiannually is callable in five years at a call price of $950. The bond currently sells at a yield to maturity of 7.5% (3.8% per half-year). a. What is the yield to call annually?

6.76% annually

Explanation:

The rate of return bondholders receives on a callable bond until the call date is called Yield to call.

Yield to Call = [ C + (F - P) / n ] / [ (F + P) / 2 ]

It is assumed that face value of Bond is $1,000

C = Coupon Payment = $1,000 x 3.8% = $38

F = Face value = $1,000

P = Call price = $950

n - = number of periods to call = 5 x 2 = 10 periods

Yield to Call = [ $38 + ($1,000 - $950) / 10 ] / [ ($1,000 + $950) / 2 ]

Yield to Call = [ $38 - 5 ] / $975 = $33 / $975 = 0.0338 = 3.38% semiannually

YTC = 3.38% semiannually = 6.76% annually