Question

Assume that the YTM from problem 18 is 3.5% and that it is callable under the conditions described in problem 21 above, what would the market price be (enter as a decimal with two decimal places - XXXX.XX)


**Problem 18: The current market price of a 7 year corporate bond with a 5% coupon if market interest rates are 6% would be: (enter answer as a decimal with two decimal places - XXXX.XX
**Problem 21: If the bond described in problem 18 above were callable in 4 years at a premium of $1,050 (based on the information in problem 18) this bond is likely to be called.

Answer 1

18. Market value of bond - 7 years

Cash flow = Face value of the bond × coupon rate

= 1000×5/100 = 50.

In the last year,

Face value of bond + interest = 1000+50=1050.

Years	Cash flow	present value factor	Present value of cash flow
1-6	50	5.3285	266.42
7	1050	.0.7859	825.20
		Market value of bond	1091.62

21. Market value of the bond - 4years

Cash flow = Face value of the bond × coupon rate

= 1000×5/100 = 50.

In the last year,

Face value of bond + interest = 1000+50=1050.

Years	Cash flow	present value factor	Present value of cash flow
1-3	50	2.8016	140.08
4	1050	0.8714	914.97
		Market value of bond	1055.05

It is likely to be called at $1050, it is also a good option because, the market value at the end of 4 years is $1055.05 which gives a gain of $5.05 for the company.