Question

Use the bond term's below to answer the question Maturity 12 years Coupon Rate 7% Face...

Use the bond term's below to answer the question
Maturity 12 years
Coupon Rate 7%
Face value $1,000
Annual Coupons
The bond is callable in year 6
The call price is $1,050


The interest rate in period 3 is 9%
If the firm calls back the bond, how much does it save or lose?

-$147
-$127
-$153
-$140
-$133
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Homework Answers

Answer #1

In order to determine the profit or loss on calling of the bond, it is necessary to compare the current price of the bond with the call price.

Current price of bond (using a financial calculator):

N = 6 years ......(maturity - time of call)

I/Y = 9 .......(interest rate in market)

PMT = 70 ......(1000 * 7%)

FV = 1000

CPT --> PV = 910.28

This means that the current price of the bond is $910.28 whereas the call price is $1,050, thus, if the company call back the bond now, it shall be facing a loss of $139.71 (1050 - 910.28) $140

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