Question

A corporation issues a 20 year bond with the final redemption value equal to the face value of $1000, and semiannual coupons of 10.5%. However, the bond is callable at the end of 10 years at $1100, and at the end of 15 years at $1040. What is the price of the bond if the investor’s yield (the “yield-to-worst”) is 9%?

Answer 1

semiannual Interest : 1000*10.5% 6/12 = 52.5

semiannual yield :9*6/12= 4.5%

semiannual months : 20 *2 = 40

Price Of Bond : [PVA 4.5%,40* Interest ] + [PVF 4.5% ,40 * Face value]

                 =[18.40158* 52.5 ] +[ .17193*1000]

                = 966.08+ 171.93

               = $ 1138.01

**find present value factor and annuity factor using financial calculator or from present value and present value annuity table respectively.