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?
A) $200.
B) $20.
C) $180.
D) $18.

Question

Quizplus · Accepted Answer

The bond has a 20-year maturity with a 20% call premium. The premium declines evenly over the last 10 years, so it decreases by 2% per year. By 2011, 9 years have passed since 2020, so the premium would have declined by 18% (9 years * 2% per year), leaving a 2% premium, which is $180 on a $1,000 bond.

Chevalier Manufacturing Issued a Callable Bond with a 2020 Maturity