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31 May, 15:15

Meacham Enterprises' bonds currently sell for $1,280 and have a per value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC) ?

Select one:

a. 6.39%

b. 7.08%

c. 7.45%

d. 6.72%

e. 7.82%

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Answers (1)
  1. 31 May, 17:29
    0
    c. 7.45%

    Explanation:

    The yield to call is the rate of return that a bondholder earns when he holds a callable bond until the call date.

    With a financial calculator, you can solve this question using the following inputs;

    Total duration to the bond being called; N = 5

    Price of the bond; PV = - 1,280

    Annual coupon payment; PMT = 135

    The call value at year 5 will be the Face value at that time hence FV = 1,050

    Compute the rate; CPT I/Y = 7.45%

    Therefore, the Yield to Call (YTC) is 7.45%
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