Happy Nappy Mattress Company issued a 10-year, 16% bond in 2003 that is callable at $1,100 in 5 years. In 2008 (today) the required return on bonds of this risk was 11%. The bonds pay interest semiannually. What would you be willing to pay for one of these bonds today if you believe the bond will be called today?

Question

Quizplus · Accepted Answer

Since the bond is callable today at $1,100, and you believe it will be called today, the price you would be willing to pay is exactly the call price of $1,100. The other details about interest rates and payments are irrelevant because the bond is being called.

Happy Nappy Mattress Company Issued a 10-Year, 16% Bond in 2003