A $1,000 par value bond is callable in 7 years. The bond has a price of $1,011.42, a coupon rate of 9 percent, and a yield-to-call of 9.6%. What is the call premium with semi annual coupon payments?

Question

Quizplus · Accepted Answer

The call premium is the amount above the par value that the issuer pays to bondholders when calling the bond before its maturity date. In this case, the bond is priced at $1,011.42, and it has a par value of $1,000. The call premium is not directly related to the coupon rate or the yield-to-call for the calculation purpose. However, given the information, we can infer that the call premium is the difference between the bond's price and its par value, which is $1,011.42 - $1,000 = $11.42. However, this calculation does not align with the provided options, indicating a misunderstanding in the explanation process. The correct approach involves understanding that the call premium should be calculated based on the bond's call price rather than its current market price or the simple difference mentioned. Since the actual call price is not provided directly in the question, and the calculation provided does not match the options, there seems to be a confusion in the explanation. The correct answer should involve calculating or knowing the call price, which includes the par value plus the call premium. Without specific details on how the call price is determined from the given information (coupon rate, yield-to-call, etc.), the direct calculation of the call premium as asked cannot be accurately provided based on the initial explanation. The correct approach would involve more detailed calculations or additional information regarding the bond's terms related to its call feature.

A $1,000 Par Value Bond Is Callable in 7 Years