Callable bond Corso Books has just sold a callable bond. It is a thirty-year mon

Question

Callable bond Corso Books has just sold a callable bond. It is a thirty-year monthly bond with an annual coupon rate of 8% and $5,000 par value. The issuer, however, can call the bond starting at the end of 5 years f the yield o call on this bond is 1 1 % and the call requires Corso Books o pay one year of additi na interest at he cal 2 coup payments . what is the bond priced with the assumption that 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

In order to calculate the price of the bond

P= (c/m)*F*(1-(1+r/m)^(-n*m))/(r/m) +C/(1+r/m)^n*m

where Where P is the callable bond price, c is the coupon rate, m is the number of coupon payments per year, F is the face value of the bond, r is the market interest rate applicable to the bond of equivalent risk, n is the number of years till the call date and C is the call price

We assume that the face value of the bond as $1000

Hence the price of the bond

P= (.08/12)*1000*(1-(1+.11/12)^(-5*12))/(.11/12)+ 5000/(1+.11/12)^(5*12)

=3198.60$

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