Question

AbC Corporations (ABC) issues a bond that pays 10% semi-annual coupon, have a $1,000 face value, and mature in 10 years. If ABC bonds are sold to yield 8%, what is the price of ABC bond at the end of year

2. If ABC issue the same bond (same coupon rate, face value and maturity) with ‘callable’ feature, would the price of ABC bond be lower or higher? Explain.

Answer 1

Solution:-

Nper = 10 years * 2 = 20

PMT =

PMT = $50

Rate =

Rate = 4%

To Calculate Price of the Bond-

Price of the Bond is $1,135.90

Callable Bond are those bonds that provides the rights to the issuer not obligation that to redeem the bond before maturity date. Callable Bond are beneficial to issuer if Interest rate of the Bond is expected to be fall. he reddem the current bond and issue new lower coupon Bond.

Valuing Callable Bonds are differ from valuing Regular bond because of embedded call Option. Price of the Callable Bond is always lower than the Straight value bond because call option adds value to the issuer.

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