The Henderson Company’s bonds currently sell for $1,275. They pay a $120 annual coupon, have a 20-year maturity, and a par value of $1000, but they can be called in 5 years at $1,120. What is the Yield to Call?


To find the **Yield to Call (YTC)** for Henderson Company's bonds, we'll use the following information:

- Current bond price ($ P_0 $) = $1,275
- Annual coupon payment ($ C $) = $120
- Time to call ($ t $) = 5 years
- Call price ($ P_{\text{call}} $) = $1,120
- Par value ($ F $) = $1,000 (though we use the call price since it's callable)
- Maturity = 20 years (but since we're focused on the call, we use 5 years for YTC)

The **Yield to Call** is calculated using a financial formula similar to the yield to maturity (YTM), except we use the call price and the years until the bond can be called. The formula is complex, so we will solve it iteratively. Here's the general approach:

\[
P_0 = \frac{C}{(1 + YTC)^1} + \frac{C}{(1 + YTC)^2} + \cdots + \frac{C + P_{\text{call}}}{(1 + YTC)^t}
\]

Where:
- $ P_0 $ is the current bond price ($1,275),
- $ C $ is the coupon payment ($120),
- $ P_{\text{call}} $ is the call price ($1,120),
- $ t $ is the number of years until the call (5),
- $ YTC $ is the yield to call (which we will solve for).

### Steps:
1. Estimate the yield using trial and error or financial calculators.
2. Solve iteratively or use a financial tool to determine $ YTC $.

Let me calculate this value for you.The Yield to Call (YTC) for Henderson Company's bonds is approximately **7.31%**.

Would you like more details on how this was calculated or have any additional questions?

Here are 5 related questions you might explore:
1. How is the Yield to Maturity (YTM) different from Yield to Call (YTC)?
2. What factors influence whether a company would call its bonds?
3. How would the bond price change if interest rates in the market increased?
4. How do callable bonds compare to non-callable bonds in terms of risk and return?
5. What is the impact of reinvestment risk on callable bonds?

**Tip:** Callable bonds often offer a higher coupon rate to compensate investors for the risk of being called before maturity.

The Henderson Company’s bonds currently sell for $1,275. They pay a $120 annual coupon, have a 20-year maturity, and a par value of $1000, but they can be called in 5 years at $1,120. What is the Yield to Call?

Learn how to calculate the Yield to Call (YTC) for Henderson Company's bonds. This detailed solution covers the bond's current price of $1,275, an annual coupon of $120, a call price of $1,120, and a 5-year call period. Understand bond valuation using present value and iterative methods to solve for YTC, which is approximately 7.31%. Suitable for finance students at the undergraduate level.

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