The callable annuity rate can be calculated as:
A) × Hurdle Rate.
B) × Hurdle Rate.
C) × Cost of Capital.
D) .

Question

The callable annuity rate can be calculated as:
A) × Hurdle Rate. 
B) × Hurdle Rate. 
C) × Cost of Capital. 
D) .

Quizplus · Accepted Answer

The callable annuity rate is calculated as the coupon rate of the callable bond multiplied by the present value factor of an annuity due, assuming that the bond will be called. This can be expressed as: 
Callable annuity rate = Coupon rate × Present value factor of annuity due, assuming bond will be called.

The present value factor of an annuity due can be calculated as (1 - (1 / (1 + r)^n)) / r, where r is the discount rate and n is the number of periods.

So, the callable annuity rate can be calculated as:
Coupon rate × (1 - (1 / (1 + Hurdle Rate)^n)) / Hurdle Rate

Therefore, the correct answer is B.

The Callable Annuity Rate Can Be Calculated As