Question

A.

You own a bond with the following features:

              Face value of $1000,

              Coupon rate of 5% (annual)

              11 years to maturity.

The bond is callable after 6 years with the call price of $1,056.

If the market interest rate is 4.71% in 6 years when the bond can be called, if the firm calls the bond, how much will it save or lose by calling the bond?

State your answer to the nearest penny (e.g., 84.25)

If there would be a loss, state your answer as a negative (e.g., -37.51)

B.

What is the price of a bond with the following features?

• Face Value = $1,000
• Coupon Rate = 3% (stated as an ANNUAL rate)
• Semiannual coupon payments
• Maturity = 8 years
• YTM = 4.37% (Stated as an APR)

State your answer to the nearest penny (e.g., 984.25)

Answer 1

bond price as 6 th year ending

reaming years to maturity=11-6=5 years

bond price on 6 th year=1012.66

calling price is 1056

loss=price on calling date- call price

=1012.66-1056

= -43.34

b) bond price =$908.34