Question of the Week

A 10-year, 8% coupon bond is currently trading at 98.5 of par. This bond is callable in 5-years at a price of 101.5. However, it also has a putable feature which comes into effect in 4 years at a strike price of 97.5. What is this bond's current yield to put measure?

a) 7.90%
b) 8.22%
c) 8.62%
d) 8.11%

Answer:

The correct answer is: a)

In your approved calculator, key the following amounts and solve for i:

FV = 97.5
PMT = 4
n = 8
PV = 98.5
i = ? = 3.95

Therefore, Yield-to-Put = 3.95 x 2 = 7.90%