Why is a call provision advantageous to a bond issuer? When would the issuer be likely to initiate a refunding call?   An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11% annual coupon

Bonds are called when the interest rates have declined after the first issue of bonds. This happens because they can then buy back their debt at about par value (which will be lower than market value when interest has fallen) and refinance their debt at lower interest rates.

Computation of Value of Bond L using PV Function in Excel:

=-pv(rate,nper,pmt,fv)

Here,

PV = Value of Bond = ?

Rate = Interest Rate = 6%

Nper = Number of Years to Maturity = 12 Years

PMT = Periodic Coupon Payment = $1,000*11% = $110

FV = Face Value = $1,000

Substituting the values in formula:

=-pv(6%,12,110,1000)

PV or Value of Bond L = $1,419.19

Computation of Value of Bond S using PV Function in Excel:

=-pv(rate,nper,pmt,fv)

Here,

PV = Value of Bond = ?

Rate = Interest Rate = 6%

Nper = Number of Years to Maturity = 1 Year

PMT = Periodic Coupon Payment = $1,000*11% = $110

FV = Face Value = $1,000

Substituting the values in formula:

=-pv(6%,1,110,1000)

PV or Value of Bond S = $1,047.17