A firm is planning to issue a callable bond with 8% coupon and 10 years to maturity.A straight bond with similar coupon is priced at $1,000.If the value of the issuer's call option is estimated to be $60,what is the value of the callable bond?
A) $940
B) $970
C) $1,000
D) $1,060

Question

Quizplus · Accepted Answer

The value of the callable bond is the value of the straight bond minus the value of the call option. The value of the straight bond is $1,000. The value of the call option is $60. Therefore, the value of the callable bond is $1,000 - $60 = $940.

A Firm Is Planning to Issue a Callable Bond with 8