You own a bond that is callable in 3.5 years. The bond has a 7% coupon,...
You own a bond that is callable in 3.5 years. The bond has a 7% coupon, paying interest semiannually, with a par value of $1000. the yield-to-call is 5.6%. what is the call premium if the bond currently sells for $ 1109.88?
A 60
B 70
C 80
D 90
E 100
Homework Answers
| Price of the bond is the sum of PVs of the: | ||
| *Call value and | ||
| *Semi annual interest | ||
| PV of semi annual interest = 35*(1.028^7-1)/(0.028*1.028^7) = | $ 219.71 | |
| PV of call value = 1109.88-219.71 = | $ 890.17 | |
| Therefore call value = 890.17*1.028^7 = | $ 1,080.00 | |
| Call premium = 1080-1000 = | $ 80.00 | |
| Answer: Option [C] $80 | ||
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