Question

You own a bond with the following features: Face value of $1000, Coupon rate of 4% (annual) 14 years to maturity. The bond is callable after 3 years with the call price of $1,075. If the market interest rate is 4.68% in 3 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)

Answer 1

  

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Value of Bond after 3 years =  

Where r is the discounting rate of a compounding period i.e. 0.0468

And n is the no of Compounding periods 11 years

Coupon 4%

=

= 942.55

Callable Value = 1075

Since the value of Bond is 942.55 and we will have to call back at 1075, there will be Loss

There will be a Loss = 942.55 - 1075 = 132.45 LOSS