Current Yield and Yield-to-First Call Calculation for a Bond | CFA Level 1 Exam Prep

Calculating Current Yield and Yield-to-First Call for a Bond

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Question

Tony Ly is a Treasury Manager with Deeter Holdings, a large consumer products holding company. The Assistant Treasurer has asked Ly to calculate the current yield (CY) and the Yield-to-first Call (YTC) on a bond the company holds that has the following characteristics:

If Ly calculates correctly, the CY and YTC are approximately:

Answers

A. 7.80% and 15.82%, respectively.

B. 7.78% and 15.72%, respectively.

C. 3.89% and 15.72%, respectively.

D. 7.78% and 15.82%, respectively.

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Explanations

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A. B. C. D.

To calculate the CY and YTC, we first need to calculate the present value of the bond: FV =1,000, N =14= 7*2, PMT =35=(1000*0.07)/2, I/Y =4.5(9 / 2), Compute

PV = -897.77 (negative sign because we entered the FV and payment as positive numbers).

Then, CY = (Face value * Coupon) / PV of bond = (1,000 * 0.07) / 897.77 =7.80%

And finally, YTC calculation: FV =1,060(price at first call), N =4(2*2), PMT =35(same as above), PV = -897.77 (negative sign because we entered the FV and payment as positive numbers), ComputeI/Y = 7.91 (semi-annual rate, need to multiply by 2) =15.82%

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