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. |

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