Bond A has a par value of R1 000 000 and matures in 20 years. It is callable in 12 years, by the issuer, at a call price of R1 268 000. It has coupon payments of 8% per annum (semi-annual). Calculate the yield to call.Select one:a.2.50%.b.6.12%.c.5.00%.d.4.56%.
Question
Bond A has a par value of R1 000 000 and matures in 20 years. It is callable in 12 years, by the issuer, at a call price of R1 268 000. It has coupon payments of 8% per annum (semi-annual). Calculate the yield to call.Select one:a.2.50%.b.6.12%.c.5.00%.d.4.56%.
Solution
To calculate the yield to call, we need to use the formula for Yield to Call (YTC) which is:
YTC = [C + (CP - P) / t] / [(CP + P) / 2]
Where: C = Annual coupon payment CP = Call price P = Purchase price t = Years until the bond can be called
Given in the problem: C = 8% of R1 000 000 = R80 000 (This is annual, but since it's semi-annual, we divide it by 2, so C = R40 000) CP = R1 268 000 P = R1 000 000 t = 12 years
Substituting these values into the formula:
YTC = [40 000 + (1 268 000 - 1 000 000) / 12] / [(1 268 000 + 1 000 000) / 2]
Solving the equation will give us the yield to call.
Please note that the yield to call is usually expressed as a percentage.
After calculating, you should be able to match your answer to one of the options given.
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