A 7.05 percent coupon bond with 25 years left to maturity can be called in eight years. The call premium is one year of coupon payments. It is offered for sale at $1,075.85. What is the yield to call of the bond? (Assume interest payments are semiannual.)

Yield to call is 5.88% 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 7.05% x 6/12 = $35.25

F = Face value = $1,000

P = Call price = $1,075.85

n -= number of periods to call = 8 x 2 = 16 periods

Yield to Call = [ $35.25 + ( $1,000 - $1075.85 ) / 16 ] / [ ( $1,000 + $1075.85 ) / 2 ]

Yield to Call = [ $35.25 - 4.74 ] / $1,037.925

Yield to Call = $30.51 / $1,037.925

Yield to Call = 0.0294

Yield to Call = 2.94% semiannually

YTC = 2.94% x 12/6 = 5.88% annually