Will owns a bond with a make-whole call provision. The bond matures in 13 years but is being called today. The coupon rate is 8.25 percent with interest paid semiannually. What is the current call price if the applicable discount rate is 7.75 percent and the make-whole call provision applies

Question

Camille Orozco

Business

30 April, 04:09

Will owns a bond with a make-whole call provision. The bond matures in 13 years but is being called today. The coupon rate is 8.25 percent with interest paid semiannually. What is the current call price if the applicable discount rate is 7.75 percent and the make-whole call provision applies

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Answers (1)

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Walter Osborne · Answer 1

Total Current Call Price = $1,668.36

Explanation:

Calculation of Present value of bond's coupon payment that is lost by premature termination of bond:

PV = C / i [1 - 1 / (1 + i) ^n]

C = Coupon amount = 1,000 x 8.25% = 82.50 / 2 = 41.25

n = Number of payment period = 13 x 2 = 26

i = Rate of Interest = 7.75 / 2 = 3.875%

PV = 41.25 / 0.03875 [1 - 1 / (1 + 0.03875) ^26] = $668.36

Add: Face value = 1,000

Total Current call price = 668.36 + 1,000 = $1,668.36