So basic question on calculating the YTM on a callable bond.
“Consider a bond selling for $1,150. This bond has 28 years to maturity, pays 12% annual coupon, and is callable in 8 years for $1,100. The yield to maturity is closest to:”
A. 10.34%
B. 9.26%
C. 10.55%
The correct answer is A, 10.34%. This comes from;
N = 28; PMT = 120; PV = -1,150; FV = 1,000 and computing I/Y = 10.3432
I understand this as its pretty basic, but wouldn’t we want to calculate the YTM on the first callable date with a FV of $1,100? If this were the case we would have;
N = 8; PMT = 120; PV = -1,150; FV = 1,100 and computing I/Y = 10.0554
This is none of the answers, so I moved onto calculating the YTM for holding the bond to maturity, but based on the question I thought to calculate the YTM from the first callable date initially. What are your guys thoughts? Should we calculate the YTM on bonds held to maturity unless otherwise noted?