Question

An investor buys a callable bond with maturity of 30 years. The bond has a face value of $1000, a call premium of $200 and it pays $10 in interest payments every 6 months. If the issuer of the bond calls the bond back after the investor has held it for 18 years what is the total income received by the bond holder during the holding period? What is the total loss of current income to the investor?

Answer 1

According to the given question, the solution as follows:-

As per the Callable Bond method

Maturity -30 Years

Face Value of Bond - $1000

Call Premium - $200

Interest Payment half-yearly-$10

Interset Payment -$20 p.a

Holding Period of the Investor is 18 years

Total Holding Period income adds to the interest income and the call premium on the early calling of security.

= 18 yrs *$20 +$200

=$560

So, Total Holding period Income is $560.

--Loss of Current Income is of remaining of part of Maturity

=$ 12 * 20 yrs- $200

=$40

So the Loss of Current income $40.