Southern Bell has issued $1000 par, 43/8% coupon bonds that mature in 6 years. The coupons on these bonds are paid semiannually. These bonds are currently trading at a price of $853.75. The bonds are callable in 2 years at a call price of $1000.
a. Compute the Yield-To-Maturity (YTM) on the bonds.
b. Compute the Yield-To-Call (YTC) on the bonds.
a. YTM is the internal rate of return earned on the bond. It can be computed as follows:
Note: 43/8 can be re-written as 4.375
Number of semi-annual periods , NPER, [6 years * 2] = 12
Semi-annual coupon amount [1,000 * 4.375% * 6/12 = 21.875] [PMT] = $21.875
Present value of ...
The solution shows the method to compute the YTC and YTM of bonds.