Assume that a 12-year semi-annual, 8% bond is callable after 5 years at 105% of par value and the discount rate in today’s market is 5%. Using the price-to-worst method, what is the value of this bond?
$1,000
$1,149
$1,170
$1,268
$1,010
Value of Bond = PV of CFs from it.
Period | CF | PVF @2.5% | Disc CF |
1 | $ 40.00 | 0.9756 | $ 39.02 |
2 | $ 40.00 | 0.9518 | $ 38.07 |
3 | $ 40.00 | 0.9286 | $ 37.14 |
4 | $ 40.00 | 0.9060 | $ 36.24 |
5 | $ 40.00 | 0.8839 | $ 35.35 |
6 | $ 40.00 | 0.8623 | $ 34.49 |
7 | $ 40.00 | 0.8413 | $ 33.65 |
8 | $ 40.00 | 0.8207 | $ 32.83 |
9 | $ 40.00 | 0.8007 | $ 32.03 |
10 | $ 40.00 | 0.7812 | $ 31.25 |
10 | $ 1,050.00 | 0.7812 | $ 820.26 |
Value of Bond | $ 1,170.34 |
OPtion C is correct.
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