CFA Practice Question

CFA Practice Question

A callable bond is selling at a price of $1,043.50. It has a coupon of 5.75%, payable semi-annually, and 8 years left to maturity. It can be called after three years at a price of $1,100, a premium of 10% over face value, which declines by $20 every year. What is the yield to maturity and yield to first call for the bond?
A. 5.08% and 7.16%
B. 5.07% and 7.19%
C. 5.08% and 5.09%
Explanation: YTM is calculated on a financial calculator as:
PV = -1,043.50; PMT = 28.75; N = 16; FV = 1,000; CPT I/Y = 2.54% s.a., or 5.08% SAR

Yield to first call is calculated on a financial calculator as:
PV = -1,043.50; PMT = 28.75; N = 6; FV = 1,100; CPT I/Y = 3.58% s.a., or 7.16% SAR

User Contributed Comments 6

User Comment
Janks Shortcut: Calculate YTC first since all three answers are different from eachother. If you are confident in your answer, you don't need to do both calculations
tijean25 Not sure how they went from 2.54 % to 5.08% neither 3.58% to 7.16%
charliedba 2.54% is 6-month rate. x2 you get annual rate.
divyapeddi why is the FV for YTM taken as 1000?
divyapeddi ok...got it.. I missed out on the 10% premium over face value.
ajshittu Thank you Janks
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