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Compute the Promised Yield to Maturity for a callable bond

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Assume you purchassed an 8 percent, 20-year, $1,000 par, semiannual payment bond priced at $1012.50 when it has 12 years remaining until maturity. Compute its promised yield to maturity and its yield to call if the bond is callable in three years with an 8 percent premium.

For the promised yield to maturity, does n = 24 or 40? Please explain and calculate.

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Solution Summary

This solution is comprised of detailed explanation and step-by-step calculations to the following question:

Assume you purchassed an 8 percent, 20-year, $1,000 par, semiannual payment bond priced at $1012.50 when it has 12 years remaining until maturity. Compute its promised yield to maturity and its yield to call if the bond is callable in three years with an 8 percent premium.

For the promised yield to maturity, does n = 24 or 40? Please explain and calculate.

Solution Preview

Using financial calculator:

In financial calculator terminology, CPT is the button you press to compute the variable you want to solve, which is in this case, the interest rate or the yield to maturity and yield to call.

To calculate the promised yield to maturity:

N is the number of years left ...

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