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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A 10-year bond with a 6% annual coupon and par value of 1,000 is priced at 1,053.15. It can be called in three years at 1,030. The yield to call is closest to:

The yield to call is about 5.00%. Discounting three annual coupons of 60 and the call price of 1,030 at 5% gives a present value of 1,053.15, which equals the market price. Using par as the redemption value or using current yield gives wrong answers.

  1. A4.10%
  2. B5.00%Correct
  3. C5.70%

Explanation

Solve for r: 60 × [(1 - 1.05^-3)/0.05] + 1,030 × 1.05^-3 = 60 × 2.72325 + 1,030 × 0.863838 = 163.40 + 889.75 = 1,053.15, so r = 5.00%. The 4.10% option wrongly uses par of 1,000 as the call price, and 5.70% is the current yield, 60 / 1,053.15.

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