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The semiannual bonds effective rate is:
10.25% > 10% (the annual bonds effective rate), so you
would prefer the semiannual bond.
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Calculating Yield for Callable and Puttable Bonds
A callable bond's valuations must account for the issuer's
ability to call the bond on the call date
The puttable bond's valuation must include the buyer's ability
to sell the bond at the pre-specified put date.
The yield for callable bonds is referred to as yield-to-call, and
the yield for puttable bonds is referred to as yield-to-put.
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Yield to Call (YTC)
Yield to call (YTC) is the interest rate that investors would
receive if they held the bond until the call date. The period
until the first call is referred to as the call protection period.
Yield to call is the rate that would make the bond's present
value equal to the full price of the bond. Essentially, its
calculation requires two simple modifications to the yield-to-
maturity formula:
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YTC
When the bond may be called and at what price are
specified at the time the bond is issued.
The price at which bond may be called is referred to as the
call price.
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Example
Consider an 18 years 11% coupon bond payable semi
annually with a maturity value of Rs 1000 selling at Rs
1169. suppose that the first call date is 8 years from now
and that the call price is Rs 1055.
Call price = 1055
N = 8*2 = 16 m
C = 1000*11%/2 = 55
Bond price = 1169
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Solution
1169 = Rs 55
1-
1 1055 1
(1+y)
16
+ (1+y)
16
y
8.54% is the yield to first call
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Yield to Put (YTP)
This mean that the bond holder can force the issuer to buy the
issue at a specified price.
Yield to put (YTP) is the interest rate that investors would receive
if they held the bond until its put date.
To calculate yield to put, the same modified equation for yield to
call is used except the bond put price replaces the bond call
value and the time until put date replaces the time until call date.
M = put price
n = number of periods until assumed put date.
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Example of YTP
Consider an 18 years 11% coupon bond payable semi
annually issue selling Rs 1169. assume that issue is
putable at par (Rs 1000) in five years.
Put price = 1000
N = 5*2 = 10 m
C = 1000*11%/2 = 55
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Solution
1169 = Rs 55
1-
1 1000 1
(1+y)
10
+ (1+y)
10
y
6.94% 7% is the yield to put
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