What is the bond's yield to call (YTC)?
Click on the arrows to vote for the correct answer
A. B. C. D.A
N = 8, PMT = 120, PV = -1150, FV = 1100, CPT I/Y.
To determine the bond's yield to call (YTC), we need to understand the concept of callable bonds and how the yield to call is calculated.
Callable bonds are bonds that give the issuer the right to redeem or call the bonds before their maturity date. When a bond is called, the issuer repurchases the bonds from the bondholders at a specified call price. The call price is typically higher than the bond's face value, and the call option allows the issuer to retire the higher-cost debt if interest rates decline.
The yield to call (YTC) is the total return anticipated by an investor if the bond is held until it is called. It represents the yield earned on the bond based on its market price, call date, call price, and the remaining time to the call date.
To calculate the yield to call, follow these steps:
Determine the call date: This is the date on which the bond can be called by the issuer.
Find the call price: The call price is the price at which the bond will be redeemed if called. It is usually specified in the bond's prospectus.
Determine the remaining time to the call date: Calculate the number of periods (usually in years) remaining until the call date.
Estimate the bond's future cash flows: Determine the cash flows the investor will receive until the call date. These typically include periodic coupon payments and the call price received at the call date.
Estimate the bond's market price: Calculate the present value of the estimated cash flows, using an appropriate discount rate. This discount rate is the yield to call, which we are trying to determine.
Use trial and error or an iterative process to find the yield to call: Adjust the discount rate until the calculated present value matches the market price of the bond. This process involves using financial calculators or specialized software.
Now, without specific information about the bond's call date, call price, remaining time to call, and market price, it is not possible to calculate the precise yield to call. Therefore, I cannot provide you with the correct answer choice or a detailed explanation of the calculation for the given question.
However, if you have access to the necessary bond details, you can follow the steps outlined above to calculate the yield to call.