With a callable bond, the yield to maturity can often be misleading if it is likely that the bond will be called. In general, a bond will only be called when interest rates have fallen since the company issued the bond. In this case, the company will refund the bond if possible (and profitable) for the company. Refunding simply means that the company issues new bonds with a lower coupon rate and repurchases (calls) the outstanding bonds with a higher coupon rate. Suppose we have a bond that has a fixed call price and the following information: 4/5/2014
With a callable bond, the yield to maturity can often be misleading if it is likely that the bond will be called. In general, a bond will only be called when interest rates have fallen since the company issued the bond. In this case, the company will refund the bond if possible (and profitable) for the company. Refunding simply means that the company issues new bonds with a lower coupon rate and repurchases (calls) the outstanding bonds with a higher coupon rate. Suppose we have a bond that has a fixed call price and the following information: 4/5/2014
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
311.
Subject :- Finance
Transcribed Image Text:With a callable bond, the yield to maturity can often be misleading if it is likely that the bond will be called. In general, a
bond will only be called when interest rates have fallen since the company issued the bond. In this case, the company will
refund the bond if possible (and profitable) for the company. Refunding simply means that the company issues new bonds
with a lower coupon rate and repurchases (calls) the outstanding bonds with a higher coupon rate. Suppose we have a
bond that has a fixed call price and the following information:
Settlement date:
4/15/2014
Maturity date:
Coupon rate:
Coupons per year:
Price (percent of par):
Redemption value (percent of par): 100
Call premium (percent of par):
7
Next call date:
10/15/2028
9.00%
2
117.4
10/15/2018
Required:
1. You are required to complete the solution in the Excel sheet by applying the appropriate formula for the calculation of
the yield to maturity of this bond. The solution and working from the Excel sheet need to be exported and saved in
Word format.
2. Calculate the yield to call of this bond by using an Excel sheet by applying the appropriate formula for the calculation
of the yield to call of this bond.
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