Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,150. What is the bond’s nominal yield to call? Solution First we will calculate bond price using excel function as follows Price=PV(6.5%/2,15*2,8.25%/2*1000,1000) We are dividng yield by 2 to compensate for semi annual coupon payments. Price of bond=$1166.09 This price is nothing but present value of future cash flows discounted at nominal YTM Thus = 82.5+ (1150-1166.09)/6/((1150+1166.09)/2) Yield to call = 6.88% .

1. Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon,
semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity,
but it can be called in 6 years at a price of $1,150. What is the bond’s nominal yield to call?
Solution
First we will calculate bond price using excel function as follows
Price=PV(6.5%/2,15*2,8.25%/2*1000,1000)
We are dividng yield by 2 to compensate for semi annual coupon payments.
Price of bond=$1166.09
This price is nothing but present value of future cash flows discounted at nominal YTM
Thus = 82.5+ (1150-1166.09)/6/((1150+1166.09)/2)
Yield to call = 6.88%