Callable bond. Corso Books has just sold a callable bond. It is a thirty-year quarterly bond with an annual coupon rate of 5% and $5,000 par value. The issuer, however, can call the bond starting at the end of 10 years. If the yield to call on this bond is 7% and the call requires Corso Books to pay one year of additional interest at the call (4 coupon payments), what is the bond price if priced with the assumption that the call will be on the first available call date?
Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity
Price of bond is calculated using PV function in Excel :
rate = 7%/4 (Quarterly YTC of bonds = annual YTC / 2)
nper = 10 * 4 (10 years remaining until first call date with 4 quarterly coupon payments each year)
pmt = 5000 * 5% / 4 (semiannual coupon payment = face value * coupon rate / 2)
fv = 5250 (call price = face value + annual coupon payment = $5,000 + ($5,000 * 5%) = $5,250)
PV is calculated to be $4,285.14
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