A company issues a 15-year $6500 bond, redeemable at 99 with bond interest at j4 = 6%

Finance Aug 06, 2020

A company issues a 15-year $6500 bond, redeemable at 99 with bond interest at j4 = 6%. The bond is callable at the end of 5 years for $4830 or at the end of 10 years for $6405. Determine the price to guarantee the investor a yield of j4 = 11%.

Expert Solution

Bond coupon =$6500*6%

= $390

Redemption price after 15 years if the bond is not called will be:

= 6500*99/100

= $6435

Price after 5 years;

Price = 390/ 0.11* (1-1 /1.11^ 5)+ 4830/1.11^ 5

=$4307.77

Price after 10 years;

Price = 390/ 0.11* (1-1 /1.11 ^10)+ 6405/1.11^ 10

=$4552.54

If the bond is never called price will be;

Price = 390/ 0.11* (1-1 /1.11^ 15)+6435/1.11^15

=$4149.38

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote