Interpreted as measure of the bonds potential return

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Reference no: EM131055157

Consider a 7% coupon 8-year bond with a maturity value of $100 currently valued at $106.36. Suppose that the first call date is 3 years from now and the call price is $103.

a. Using the numbers above and the bond pricing formula, explain how the yield to the first call date is calculated. No calculation is required.

b. Suppose the yield to first call on a bond-equivalent basis is 5.6%, under what assumptions can this be interpreted as a measure of the bond’s potential return?

Reference no: EM131055157

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