Callable bond. Corso Books has Just sold a callable bond. It is a thirty year qu

ID: 2811714 • Letter: C

Question

Callable bond. Corso Books has Just sold a callable bond. It is a thirty year quarterly bond with an annual pon al of 8% and $5,000 par value. The issuer, however, can call the bond starting at the end of 8 years. the eld to cal on this bond is 6% and the cal requires orso ooks to pay one year of additional interest at the ca 4 coupon payments what is the ond pr ce f priced with the assumption hat the call will be on the first available call date? What is the bond price if priced with the assumption that the call will be on the first available call date? Round to the nearest cent.)

Explanation / Answer

The maturity value cannot be more than Face value + 4 coupon payments.

Using financial calculator BA II Plus - Input details:

I/Y = R = Yield to Call / frequency of coupon in a year = 6/4 =

1.500000

PMT = Coupon rate x Face value / frequency = -5000 x 8%/4 =

-$100.00

N = Number of years remaining x frequency = 8 x 4 =

FV = Maturity Value or Call value = -5000 x (1+8%) =

-$5,400.00

CPT > PV = Price of bond on first call date =

$5,880.08