Chapter#3 bonds: BOND AMORTIZATION CALLABLE BONDS
Author : pamella-moone | Published Date : 2025-05-16
Description: Chapter3 bonds BOND AMORTIZATION CALLABLE BONDS Salma Alsuwailem 2 Salma Alsuwailem 3 Salma Alsuwailem What is a callable bond A callable bond is a bond which gives the issuer not the investor the right to redeem prior to its maturity
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Transcript:Chapter#3 bonds: BOND AMORTIZATION CALLABLE BONDS:
Chapter#3 bonds: BOND AMORTIZATION CALLABLE BONDS Salma Alsuwailem 2 Salma Alsuwailem 3 Salma Alsuwailem What is a callable bond? A callable bond is a bond which gives the issuer (not the investor) the right to redeem prior to its maturity date, under certain conditions. When issued, the call provisions explain when the bond can be redeemed and what the price will be. In most cases, there is some period of time during which the bond cannot be called. This period of time is named the call protection period. The earliest time to call the bond is named the call date. The call price is the amount of money the insurer must pay to buy the bond back. Assuming that the redemption value is a constant and that a bond can be called after any coupon payment: (i) if Fr > Ci (bond sells at a premium), 𝑃t increases with t, and we assume the redemption date is the earliest possible. (ii) if Fr < Ci (bond sells at a discount), 𝑃t decreases with t, and we assume that the redemption date is the latest possible. 4 Salma Alsuwailem examples Matt purchased a 20-year par value bond with an annual nominal coupon rate of 8% payable semiannually at a price of 1722.25. The bond can be called at par value X on any coupon date starting at the end of year 15 after the coupon is paid. The lowest yield rate that Matt can possibly receive is a nominal annual interest rate of 6% convertible semiannually. Calculate X. (A) 1400 (B) 1420 (C) 1440 (D) 1460 (E) 1480 5 Salma Alsuwailem Toby purchased a 20-year par value bond with semiannual coupons of 40 and a redemption value of 1100. The bond can be called at 1200 on any coupon date prior to maturity, starting at the end of year 15. Calculate the maximum price of the bond to guarantee that Toby will earn an annual nominal interest rate of at least 6% convertible semiannually. (A) 1251 (B) 1262 (C) 1278 (D) 1286 (E) 1295 6 Salma Alsuwailem Mary purchased a 10-year par value bond with an annual nominal coupon rate of 4% payable semiannually at a price of 1021.50. The bond can be called at 100 over the par value of 1100 on any coupon date starting at the end of year 5 and ending six months prior to maturity. Calculate
