Question

Carolina issued a 15-year semi-annual non-callable bond four years ago. Bond has a $1,000 face value,...

  1. Carolina issued a 15-year semi-annual non-callable bond four years ago. Bond has a $1,000 face value, coupon rate of 6% and it currently sells for $945. Carolina needs to issue 10-year semi-annual note. Note will be non-callable and is expected to get the same credit rating as outstanding bond issue. If Carolina wants to issue and sell new note at par, find approximate coupon rate that needs to be assigned to the note. (Hint: similar bonds/notes should be providing approximately same return
  2. Consider Carolina’s outstanding bond in the problem above: it is semi-annual 15-year bond issued 4 years ago, it sells for $945 and has 6% coupon. If this bond were callable with 3 years prior to maturity, how can one estimate average expected profitability on this bond? (Assume call price of $1060).

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