A 1000 par value bond pays annual coupons of 80. The bond is redeemable at par in 30
years, but is callable any time from the end of the 10th year at 1050. Based on her desired
yield rate, an investor calculates the following potential purchase prices, P:
• Assuming the bond is called at the end of the 10th year, P = 957.
• Assuming the bond is held until maturity, P = 897.
The investor buys the bond at the highest price that guarantees she will receive at least
her desired yield rate regardless of when the bond is called. The investor holds the bond
for 20 years, after which time the bond is called. Calculate the annual yield rate the
investor earns.
The solution is
897 = 80 a angle 20 + 1050 v^20
and i = 9.24%
can someone explain why we are using 897 for the price of a bond that was called at year 20?
years, but is callable any time from the end of the 10th year at 1050. Based on her desired
yield rate, an investor calculates the following potential purchase prices, P:
• Assuming the bond is called at the end of the 10th year, P = 957.
• Assuming the bond is held until maturity, P = 897.
The investor buys the bond at the highest price that guarantees she will receive at least
her desired yield rate regardless of when the bond is called. The investor holds the bond
for 20 years, after which time the bond is called. Calculate the annual yield rate the
investor earns.
The solution is
897 = 80 a angle 20 + 1050 v^20
and i = 9.24%
can someone explain why we are using 897 for the price of a bond that was called at year 20?
callable bond question
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