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.
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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