Question

The bond is expected to be a 5-year, $100,000 face value, 6% bond with an effective annual yield of 5%. Interest will be payable semiannually. If all goes well, the bond will be issued on March 1, 2020, and the first interest payment date will be September 1, 2020. The bonds are expected to be callable at 102 at any time on or after March 1, 2022.

Amortize the bond using the effective-interest method.

1.) What are the pros and cons of calling the bond before maturity? What are some things to consider?

2.) Include an amortization schedule using the effective interest method as an exhibit to follow your memo (you do not need to consider prorations).

Answer 1

1. Answer

Pros

Pay a higher coupon or financing cost

Financial specialist financed obligation is greater adaptability for the guarantor

Assists organizations with raising capital

Call highlights permit review and renegotiating of obligation

Cons

Financial specialists must supplant called securities with lower rate items

Financial specialists can't exploit when market rates rise

Coupon rates are higher raising the expenses to the organization

This is something to be consider for Callable bonds

Callable securities normally pay a higher coupon or loan cost to financial specialists than non-callable bonds. The organizations that issue these items advantage also. Should the market loan fee fall lower than the rate being paid to the bondholders, the business may call the note. They may at that point, renegotiate the obligation at a lower loan fee. This adaptability is generally more good for the business than utilizing bank-based loaning.

Be that as it may, only one out of every odd part of a callable bond is ideal. A backer will more often than not call the security when loan costs fall. This considering leaves the financial specialist presented to supplanting the speculation at a rate that won't restore a similar degree of salary. Then again, when market rates rise, the speculator can fall behind when their assets are tied up in an item that pays a lower rate. At long last, organizations must offer a higher coupon to pull in speculators. This higher coupon will build the general expense of taking on new ventures or extensions.

2.

		$ 500000 *102 % = $ 5,10,000
			Carrying
Cash Paid	Interest	Amortize	Amount of
Semi - Annual	Expenses		Bond
	Effective
	$2.48		$5,10,000.00
$12,500.00	$12,190.34	$309.66	$5,09,690.34
$12,500.00	$12,187.21	$312.79	$5,09,377.55
$12,500.00	$12,187.40	$312.60	$5,09,064.95
$12,500.00	$12,187.60	$312.40	$5,08,752.55
$12,500.00	$12,187.79	$312.21	$5,08,440.34
Interest Paid
$ 5,00,000 * 5 % * 6/12
= $ 12,500