a 10-year 5% ABC company bond is callable after 7 years and trades at par. Regular 7 and 10-year borrowing costs for the company are 4 % and 4.5%, respectively. Interest is paid semi-annually. The approximate value of the call option is.
Homework Answers
Value of call option will be given by following formula
value of call = (coupon + (face vale - call vale)/n)/(face value + call value)/2
= (5 + (100 - 100)/7)/(100 + 100)/2
= 5%
Correct answer is option c. 5%
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