Sadik Inc.'s bonds currently sell for $1,270 and have a par value of $1,000/. They pay a $105 annual coupon and have a 15 year maturity, but they can be called in 5 years at $1,000. What is their yield to call (YTC)?
multiple choice answers
a. 6.89%
b. 5.89%
c. 5.18%
d. 6.54%
e. 6.30%
what is the correct answer
To calculate the yield to call (YTC) of Sadik Inc.'s bonds, we need to use the formula for yield to call:
YTC = (Annual coupon + [(Par value - Call price) / Years to call]) / [(Par value + Call price) / 2]
Let's plug in the given values into the YTC formula:
Annual coupon = $105
Par value = $1,000
Call price = $1,000
Years to call = 5
YTC = (105 + [(1,000 - 1,000) / 5]) / [(1,000 + 1,000) / 2]
Since the call price is equal to the par value, the numerator of the equation becomes zero:
YTC = (105 + 0) / [(1,000 + 1,000) / 2]
Simplifying further:
YTC = 105 / (2,000 / 2)
YTC = 105 / 1,000
YTC ≈ 0.105 or 10.5%
Therefore, the yield to call (YTC) of Sadik Inc.'s bonds is approximately 10.5%.