Question

(1) XYZ just issued bonds with the following terms:

Principal amount          $1,000

Annual coupon rate     15% starting after 4 years (that is in year 5)

Maturity                      10 years

Callable                       @ $1,150 (that is face value + one year’s interest)

a) Based of the features described above, this bond belongs to two categories of corporate bonds that we discussed in the class. What are they? (3 points)

b) What is the bond’s price if comparable debt yields 13 percent?  You must show your full work to earn all the points in this question (9 points)

c)What is the bond’s current yield? (1 point)

d) Based on your answers so far, do you think the issuer of this bond will call this bond? Why or why not? (2 points)

Answer 1

1- Features of bonds: 1- callable bonds because these bonds can be called at a value of 1150 before the maturity of bonds. 2 deferred coupon bonds because in these bonds no coupon would be paid in the initial 4 years and coupon would be start paying from the 5th year

2-	Year	cash flow	present value of cash flow at 13% = cash flow/(1+r)^n r =13%
	1	0	0
	2	0	0
	3	0	0
	4	0	0
	5	150	81.41399
	6	150	72.04778
	7	150	63.7591
	8	150	56.42398
	9	150	49.93273
	10	1000	294.5883
	value of bond =sum of present value of cash flow		618.17
3-	Bond current Yield	coupon payment/market price of bond	0/618.16	0%
4-	No issuer will not like to call the bond because market value of bond is 618.17 which is less than the callable value of 1150.