You own a bond that is callable in 3.5 years. The bond has a 7% coupon, paying interest semiannually, with a par value of 41,000. The yield-to-call is 5.6%. What is the call premium if the bond currently sells for $1,109.88%

Question

Quizplus · Accepted Answer

To calculate the call premium, we need to find the price at which the bond would have been sold if it was not callable. We use the yield-to-maturity (YTM) formula for this.

PMT = 7% of 41,000/2 = $1,435
n = 7 x 3.5 = 24.5 semi-annual periods
i = 5.6% / 2 = 2.8%

Using the YTM formula, we find the price of the bond to be $1,150.88.

To find the call premium, we subtract the market price of the bond ($1,109.88) from the price at which it would have been sold if it was not callable ($1,150.88) and add the call price ($1,000). This gives us:

Call premium = ($1,150.88 - $1,109.88) + $1,000 = $80

Therefore, the answer is C) $80.

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