Question

A company issues a 15-year $5000 bond, redeemable at 105 with bond interest at j12 = 6%. The bond is callable at the end of 5 years for $3945 or at the end of 10 years for $5535. Determine the price to guarantee the investor a yield of j12 = 10%.

Answer 1

Answeg Pageno Bond Coupon = $ 5000 x 6% = $ 300 Redemption price after is if the bond is not called Isyears 50O0 X 105 100 5,250 If the bond is called after syearl for $ 3945 and the investor should get 10% return Price 300 1 0-14(1-4.s) + 3qus i.is $ 3586077 for $5535 If the bond is called after 10 10 years for the investoa should get 10% return Price 5535 0.11-1 300 + 1.10 = $3977-35

Pageno@ If the bond is never Called, for the investor should get 10% retuin Price= 300 0-1*(-s) + sasa 1's = 3538.63 Hence, the bond at the investors by Purchasing the minimum of the three prial as above At the poice of $ 3538.63 , will themselves Yield 10% g warnte Porice ia $ 3538.63 to Investor a Yield of all=10% garuntee the