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It is now January 1, 2015, and you are considering the purchase of an outstanding Racette Corporation bond that was issued on January 1, 2013. The Racette bond has a 9.5 percent annual coupon and a 30-year original maturity (it matures on December 31, 2042). There is a 5-year of call protection (until December 31, 2017), after which time the bond can be called at 109 (that is, at 109 percent of par, or $1,090). Interest rates have declined since the bond was issued, and the bond is now selling at 116.575 percent of par, or $1,165.75.
a) What is the yield to maturity and the yield to call for this bond?
b) If you bought this bond, which return would you actually eran? Explain your reasoning.
c) Suppose the bond had been selling at a discount rather than a premium. Would the yield to matturity have been the most likely return, or would the yield to call have been most likely?
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The yield to maturity on a bond:
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