Chevalier Manufacturing issued a callable bond with a 2020 maturity date.The bond was sold at par and the call premium was set equal to the coupon rate of 20%.A declining call premium was
Also in place so that the premium declined evenly over the last ten years of premium to zero.What
Would be the call premium if the bond was called in 2011?

Question

Quizplus · Accepted Answer

Since the bond was issued at par with a coupon rate of 20%, the bond price equals the face value of the bond, which is not given in the question. However, we know that the call premium declines evenly over the last ten years of the bond's life to zero. If the bond was called in 2011, there would be 9 years left until maturity, and the call premium would be equal to 20% x 9 = 180% of the face value. Therefore, the correct answer is C, €180.

Chevalier Manufacturing Issued a Callable Bond with a 2020 Maturity