For
comments, observations, questions and answers, email; theotherwomaninmarriage@gmail.com
Like
I said, this is exam question. So, pay
keen attention to the formula and workings – there is nothing wrong with you
cramming formulas and steps. Honestly, the examiners will not penalize you for
cramming formulas and steps. Once the answer sheet is shared, write down all
the formulas you have crammed at the end of your answer sheet. Then you can
strike it off later after you have finish with the paper.
THE QUESTION:
The
Other Woman In Marriage Corporation has a 12
PERCENT Semi-Annual Bond issue with F=N1,000 that matures in 15 years but is
called in 6 YEARS at N1,200. If the CURRENT
PRICE OF BOND is N900, determine the YIELD – TO – CALL.
Note: You need a calculator, pen and paper
by your side to ascertain how I got the answer below:
SOLUTION:
Given that i=12%
Number of years to maturity = 15 years
Number of years to first call date = 6 years
Current Price of Bond = N900
Call Price of the Bond = N1,200
To determine the Yield – To – Call, here is the formula:
YTC = Annual Coupon
Payment + (Call Price – Market Price)
Number of Years To Call Date
½ (Call Price + Market Price)
Pls, take note of the above long line and the short
one. It demarcates our
working/calculations.
YTC = 120 + (1,200
– 900)
6_____
½ (1,200
+ 900)
Before
we continue, let me do a little explanation here: YTC = 120. I got the 120 from i, which is 12% multiply
by Face Value which is N1,000. The Face
Value was shorten to F in the question.
Now let’s ride on from where we stop.
YTC = 120+50 = 170 = 0.1619 = 16.19%
The Yield-To-Call is
16.19%.
CLARIFICATION: - You know how I got 120
right? If you don’t have explained that above.
The 50 is gotten from 1,200 – 900 = 300.
300/6=50. Remember, I said you
should pay attention to one long line below in the formula, that means answer
gotten above will be divided by the answer below that long line. So now we have at the top 120+50.
But
we are yet to explain the ½ (1,200 +900).
When You add 1200+900, it gives you 2,100. Now divide ½ x 2,100 you will have
1,050. That is how we got;
120 + 50 = 170
1,050 1,050
170
1,050 will give you 0.1619. Then convert it to percentage by doing this
0.1619 x 100 = 16.19%. That is it -
Simple huh?
NOTE:
Check
out the book “The Other Woman In Marriage” at www.okadabooks.com. Also, don’t forget to search the blog archive
by your left hand side for past different topics treated.
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