Question

A $1000 par value 6% bond with semiannual coupons matures at the end of ten years. The bond is callable at $1100 five years after issue. Find the maximum price that an investor can pay and still be certain of a yield rate of (1) 5%, (2) 7%, convertible semiannually. (Answers: (1) $1121.88, (2) $979.19). Show all work and numerical equations please.

Answer 1

since in case 1 interet rate is 5%(Lower than coupon rate) therefore definitely it will be called in 5 year
For case 2, interest rate is 7% (Higher than coupon rate of 6%) therefore its fine to have full maturity of 10 year
	We have to use financial calcualtor to solve this
	Put in calculator for each case
		Case _5%		Case _7%
FV		1100		1100
PMT	=1000*6%/2	30		30
I	5%/2	2.50%	7%/2	3.50%
N	5*2	10	10*2	20
Compute PV		($1,121.88)		($979.19)
Price =		$1,121.88		$979.19