EXERCISE #6: A 5-year 6% annual coupon bond yields 4%. The bond is callable in one or two years at 102. What is the yield to call? Solve the problem in stages. 1. Compute the price of the bond first. Assume face=$1000.
a. Calculate the present value of the bond's annual coupon payments for 5 years at a 6% coupon rate and a 4% yield to maturity.
b. Calculate the present value of the bond's face value at the end of 5 years at a 4% yield to maturity.
c. Add the present values of the coupon payments and face value to find the total present value of the bond.
d. Adjust the total present value for the callable feature at 102% if called in one or two years to find the price of the bond.