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Callable bonds & Yield to call date word problem

  1. Oct 1, 2008 #1
    1. The problem statement, all variables and given/known data
    A corporation sold a 20-year, 10% semi-annual coupon bond issue 2 years ago. The bonds are callable at 108 ( percent of face value) 5 years after issue and at 104 (percent of face value) 10 years after issue. If the bonds are currently priced at 102.5 (percent of face value),

    a) what would be a purchase’s
    i) Yield to the first call date ?
    ii) Yield to the second call date ?
    iii)Yield to maturity ?



    2. Relevant equations
    Average Investment method:

    Approx value of i = avrg income per interest payment interval
    average book value
    where
    Average book value = 1/2 (quoted price + redemption price)
    and
    Average income =Total interest payments (premium or discount)
    per interest number of interest payment intervals
    payment interval

    3. The attempt at a solution

    I have solved similar problems but with a value i.e. 25-year $1000 bonds with the follwing formula:

    Price at a certain date P= R* 1-(1+ Y)^-n + F(1+Y)^-n
    Y

    Any suggestions on how to start?
    Thank you in advance
     
  2. jcsd
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