Company considering bonds for sale that have a $1000 par value and will mature in 16 years. The coupon rate on the bonds is 5% paid annually and are currently selling for $987 each. The bonds are called protected for the next 4 years and after this period they are callable at 105.
1) What is the YTM on these bonds?
2) If the bonds are called immediately after the call protection period, what would be the yield to call (YTC)?
3) If the bonds paid interest semi-annually instead of annually, would the YTC, the YTM, or both change?
Solution depicts the steps to estimate YTC and YTM in the given case. Solution is derived by using built-in function in MS Excel.