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Calculating YTM and YTC

Delta Industries has just issued callable ten-year, 8% coupon bonds with semi-annual coupon payments. The bonds can be called at par in four years or anytime thereafter on a coupon payment date. The current bond price is $1000. For an investment today in these bonds (assuming no transaction costs):

a. What is an investor's Yield to Maturity?
b. What is an investor's Yield to Call?

Two years ago, Delta Industries issued callable fifteen-year, 7% coupon bonds at par value of $1,000 per bond with annual coupon payments. The bonds have just completed their second coupon payment. The bonds can be called at par five years from the date of issue or anytime thereafter on a coupon payment date. It has a current price of $1100. For an investment today in one of these bonds (assuming $15 in transaction costs):

c. What is an investor's Yield to Maturity?
d. What is an investor's Yield to Call?

Solution Preview

Please refer attached file for better understanding of functions.

Solution:

a.  What is an investor's Yield to Maturity?
Face Value of bond=1000
Price of bond=1000
Semi annual coupon=40
Since bond is available at par, yield to maturity is equal to coupon rate i.e. 8%

b.  What is an investor's Yield to Call?
Since bond is available at par and can be called at par, yield to call is equal to coupon rate i.e. 8%

Two ...

Solution Summary

Solution describes the steps to calculate yield to maturity(YTM) and yield to call (YTC) for a callable coupon paying bond.

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