Question

NYU issued a 20-year bond that pays a semi-annual coupon of $32.00, has a par value of 1,000, and a nominal annual yield-to-maturity of 7.639 percent. This bond can be called in 5 years, and the nominal annual-yield to call is 10.15 percent. Determine the call premium for this bond.

Answer 1

Calculation of current price of the bond:

FV = 1000
Nper = 20 * 2 = 40
PMT = 32
Rate = 7.639% / 2

Price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(7.639%/2,40,-32,-1000)
= $874.02

Calculation of call price:

Nper = 5 * 2 = 10
Rate = 10.15% / 2 = 5.075%
PV = $874.02
PMT = 32

Call price can be calculated by using the following excel formula:
=FV(rate,nper,pmt,fv)
=FV(5.075%,10,32,-874.02)
= $1,029.98 or $1,030

Call premium = $1,030 - $1,000 = $30

Call premium = $30 (Rounded to nearest whole dollar)