Problem:
It is now January 1, 2012, and you are considering the purchase of an outstanding bond that was issued on January 1, 2010. It has a 7.5% annual coupon and had a 30-year original maturity. (It matures on December 31, 2039.) There is 5 years of call protection (until December 31, 2014), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 119.575% of par, or $1,195.75.
Requirement:
Question 1: What is the yield to maturity?
Question 2: What is the yield to call?
Note: Provide support for your rationale.