A Step-Up Note is a type of bond with a coupon rate that increases over time according to a contractual schedule as shown below. The Note pays coupons semi-annually on May 15 and November 15 and has a term to maturity of 6 years. Assume today is November 15 so there is exactly 6 months to the next coupon. Par is $1,000. The Step-Up Note differs from the typical bond because the coupons cannot be treated as an ordinary annuity [a fixed cash flow for a limited term] so the PMT key on the calculator cannot be used. The Note is a semi-annual series of unequal cash flows for a limited time period.
Year 1 2 3 4 5 6
Coupon 15-May-17 15- May-17 15-May-18 15-May-19 15-May-20 15-May-21
Dates: 15-Nov-17 15-Nov-18 15-Nov-19 15-Nov-20 15-Nov-21 15-Nov-22
Coupon 3.00% 3.50% 4.00% 4.50% 5.00% 6.00%
If the Note is trading at 102.25, the Yield to Maturity of the Step-Up Note is:
a. 1.89%
b. 2.13%
c. 3.47%
d. 3.77%
e. 4.25%