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A 4
A 4.30% coupon callable bond maturing in 15 years is trading at par. The yield to call is 5%. The next call date is in 1 year at the call price of $100.50. What is the callable bond's call option premium?
(Round to 2 decimal places.)
Expert Solution
Call option premium is $0.70
Step-by-step explanation
Let P be Par value of bond
Then;
P= (P*4.30% +$100.50)/(1+5%)
=> P(1+5%)= P*4.30% +$100.50
=> P+ 5%P= 4.30%P+$100.50
=> P+ 5%P -4.30%P= $100.50
=> P+0.70%P= $100.50
=> P(1+0.007)= $100.50
P= $100.50/1.007
= $99.80
Now;
Call option premium= Call price - Par value (P)
= $100.50 - $99.80
= $0.70
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