The market yield rate on a twelve-year 7% annual-pay bond is 6%.The bond is callable in three years and its yield to call is 5.7%.What is the call price of the bond?

Question

Quizplus · Accepted Answer

To calculate the call price, we need to compare the present value of the bond's cash flows if it is held until maturity versus if it is called in three years.

If the bond is held until maturity, the total present value of the cash flows would be:
PV = (7/0.06)*(1 - 1/1.06^12) + 1000/1.06^12
PV = 860.49

If the bond is called in three years, the total present value of the cash flows would be:
PV = (7/0.057)*(1 - 1/1.057^3) + 1000/1.057^3
PV = 1057.74

Therefore, the call price of the bond is $1057.74. Option A is the correct choice.

The Market Yield Rate on a Twelve-Year 7% Annual-Pay Bond