A callable bond with £100 face value and 15 years maturity, has been issued at par with a coupon rate 10% paid annually. The call option can be exercised, and the bond can be redeemed earlier at any time after 3 years from the date it was issued, at call price £132. If 3 years after its issue, when the bond can be redeemed, the yield to maturity has dropped to 5%, explain whether the issuer will exercise the call option to redeem the bond.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
A callable bond with £100 face value and 15 years maturity, has been issued at par with a
coupon rate 10% paid annually. The call option can be exercised, and the bond can be
redeemed earlier at any time after 3 years from the date it was issued, at call price £132. If 3
years after its issue, when the bond can be redeemed, the yield to maturity has dropped to 5%,
explain whether the issuer will exercise the call option to redeem the bond.
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