A bond with a 6% coupon rate, paid semi-annually, has 3 years remaining to maturity and a yield to maturity of 5%. If the bond has a face value of $1,000 and is callable at $1,030 in one year, what is its yield to call (YTC)?

Question: A bond with a 6% coupon rate, paid semi-annually, has 3 years remaining to maturity and a yield to maturity of 5%. If the bond has a face value of $1,000 and is callable at $1,030 in one year, what is its yield to call (YTC)?

Answer options:

• 6.00%
• 5.00% ✅ 7.24%
• 8.50%

Correct answer: 7.24%

Explanation: To calculate the Yield to Call (YTC), we need to solve for the discount rate that equates the bond's current market price to the present value of the cash flows until the call date. First, calculate the current market price using the YTM (5%). Then, using this price, the semi-annual coupon payments, and the call price of $1,030 after 2 semi-annual periods (1 year), solve for the semi-annual YTC and annualize it. The current price would be approximately $1,027.24. Using this price, the YTC to $1,030 in one year would be approximately 7.24%.