RTE Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $950.35. However, RTE Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on RTE Inc.’s bonds?

YTM = 16.55%

Explanation:

RTE Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $950.35. However, RTE Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on RTE Inc.’s bonds?

YTM=  n th root of (Current Price/Face Value ) −1

where:

n=number of years to maturity  = 18 years

Face value=bond’s maturity value or par value  = $1,000

Current price=the bond’s price today  = $950.35

18√(950.35/1000) - 1

YTM = 16.55 %

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