Can anyone figure out this bond math?
Can anyone figure out the above bond math? The author of the book didn't outline any assumptions but I'm having trouble understanding why a bond trading at 101 would have a yield greater than the 10% coupon. The call premium might have something to do with the yield calculation but I would love to know how the yields in these two tables are being calculated or what assumption I'm missing since I thought yield was just annual interest / market price.
Did you work out any math around the call price? The bond's current trading price is 101 and call price is 105.
Did some digging myself. Here are the assumptions to get a yield of 11.05%.
Years to maturity = 5 (but doesn't really matter with a call) Years to call = 3 Par value = 1000 Bond Price = 1010 Call Price = 1050 Coupon Rate = 0.10 > 10%
Always assume bonds compound semiannually unless otherwise stated.
Plug those numbers in and you will see the yield to call is 11.05.
Try plugging in other combinations and see how it flows.
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