Yield to Call
Many bonds, especially those issued by corporations, are callable. This means that the issuer of
the bond can redeem the bond prior to maturity by paying the call price, which is greater than the
face value of the bond, to the bondholder. Of
where
B0 = the bond value,
C = the annual coupon payment,
F = the face value of the bond,
r = the required return on the bond, and
t = the number of years remaining until maturity.
Bond Valuation Example
Find the price of a semiannual coupon bond wit
Yield to Maturity
The yield to maturity on a bond is the rate of return that an investor would earn if he
bought the bond at its current market price and held it until maturity. It represents the
discount rate which equates the discounted value of a bond'
The amount of money the issuer has to pay to call a callable bond. When
a bond first becomes callable, i.e., on the call date, the call price is often
set to equal the face value plus one year's interest.
Required Return
The rate of return that investors
Years to Maturity:
Call Price:
$
Years until Call Date:
%
Yield to Call:
Bond Valuation Equations
Semiannual Coupon Bonds
Bond Price:
Yield to Maturity:
Example Problems
Find the yield to maturity for the semiannual coupon bond with the following features.
Bond Price:
$
Face Value:
$
%
Coupon Rate:
Years to Maturity:
%
Yield to Maturity:
Discount Bonds
A bond is considered to be a discount bond when its price is less than its face value.
This will occur when the coupon rate is less than the required return on the bond.
Example Problems
Find the value for the semiannual coupon bond with th
make the task of solving for the yield to maturity quite simple.
Yield to Call Example
Find the yield to call on a semiannual coupon bond with a face value of $1000, a 10% coupon
rate, 15 years remaining until maturity given that the bond price is $1175 a