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21 March, 21:56

Bond Features Maturity (years) 5 Face Value = $1,000Coupon Rate = 5.00%Coupon dates (Annual) Market interest rate today 5.00%Time to call (years) 3 Price if Called $1,050.00Market interest rate in Year 3 is 2.00% The above bond is callable in 3 years. When the bond is issued today, interest rates are 5.00%. In 3 years, the market interest rate is 2.00%. Should the firm call back the bonds in year 3 and if so, how much would the firm save or lose by calling back the bonds? a. yes it should call back the bonds, it will save $8.25b. yes it should call back the bonds, it will save $7.83c. no it should not call back the bonds, it will lose $7.83d. yes it should call back the bonds, it will save $8.49e. no it should not call back the bonds, it will lose $8.25f. no it should not call back the bonds, it will lose $8.49

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  1. 21 March, 22:12
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    it should call back the bonds as it will save $8.25

    Explanation:

    Bond Price can be calculated using PV function. After 3 years,

    N = 2, PMT = 5% x 1000 = 50, FV = 1000, I/Y = 2%

    => Compute PV = $1,058.25

    Without the call option, the bond would be worth $1,058.25. But the firm can buy those bonds at $1,050.

    Hence, it should call back the bonds as it will save $8.25
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Home » Business » Bond Features Maturity (years) 5 Face Value = $1,000Coupon Rate = 5.00%Coupon dates (Annual) Market interest rate today 5.00%Time to call (years) 3 Price if Called $1,050.00Market interest rate in Year 3 is 2.
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