Question

(1 point) A company issues a 25-year $9500 bond, redeemable at 95 with bond interest at j12 = 6%. The bond is callable at the end of 15 years for $7925 or at the end of 20 years for $9400. Determine the price to guarantee the investor a yield of j12 = 10%. Answer: $

Answer 1

Computation of current price of bond when bond callable at the end of 15 years: = Bond interest * Annuity value (10%, 15 years) + callable price * PVF(10%,15 years) = $9500*6% * 7.6061 + $7925*0.2394 = $4335.48 + $1897.25 = $6232.73 Computation of current price of bond when bond callable at the end of 20 years: = Bond interest * Annuity value (10%, 20 years) + callable price * PVF(10%,20 years) = $9500*6% * 8.5136 + $9400*0.1486 = $4852.75 + $1396.84 = $6249.59