Question

A company issues a 15-year $9000 bond, redeemable at 105 with bond interest at j1 = 8%. The bond is callable at the end of 5 years for $7345 or at the end of 10 years for $8935. Determine the price to guarantee the investor a yield of j1= 10%.

Answer 1

Bond coupon =$9000*8%= $720

Redemption price after 15 years if the bond is not called = 9000*105/100 = $9450

If the bond is called after 5 years for $7345 and the investor should get 10% return

Price = 720/0.1*(1-1/1.1^5)+7345/1.1^5

=$7290.03

If the bond is called after 10 years for $8935, for the investor should get 10% return

Price = 720/0.1*(1-1/1.1^10)+8935/1.1^10

=$7868.92

If the bond is never called , for the investor should get 10% return

Price = 720/0.1*(1-1/1.1^15)+9450/1.1^15

=$7738.63

So, the investors, by purchasing the bond at the minimum of the three prices as above i,e at a price of $7290.03 , will guarantee themselves a yield of 10%

Price is $7290.03 to guarantee the investor a yield of j1= 10%.