Question

5) Consider a 5% callable bond with 20 years maturity and 8% yield which pays the...

5) Consider a 5% callable bond with 20 years maturity and 8% yield which pays the face value plus 10% if it is redeemed before maturity. If after 10 years the bond is redeemed, find an upper bound for the yield at that time. Assume that coupon payments are made on per year.

Homework Answers

Answer #1
Assume face Value= $1,000
Coupon payment per year $50 (1000*0.05)
Number of years 20
Yield 8%
Bond Price =Present Value of Future cash flows
Bond Price $705.46 (Using PV function of excel with Rate=8%, Nper=20, Pmt=-50, FV=-1000)
Bond Price $705.46
Coupon payment per year $50
Number of years 10
Amount received at the time of redemotion $1,100 (1000*1.1)
Yield 10.51% (Using RATE function with Nper=10,Pmt=50, PV=-705.46, FV=1100)


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