ABC Inc. has bonds outstanding that are calling today under the make-whole call provision. The bonds mature in 4 years, with interest paid semiannually. The bonds have a par value of 41,000 and a 9% coupon. What is the today's call price if the relevant discount rate is 8.45%?

Question

Quizplus · Accepted Answer

To calculate the make-whole call price, we need to find the present value of the remaining cash flows to the bondholder.

Step 1: Calculate the semiannual coupon payment 
Coupon payment = Par Value * Coupon Rate / 2 
Coupon payment = 41,000 * 9% / 2 = $1,845

Step 2: Calculate the number of semiannual periods remaining until maturity 
Number of semiannual periods = 4 years * 2 = 8 semiannual periods

Step 3: Calculate the present value of the remaining cash flows using the relevant discount rate 
PV of coupon payments = Coupon payment * [1 - (1 + r)-n] / r 
PV of coupon payments = 1,845 * [1 - (1 + 0.0845/2)-8] / (0.0845/2) = $14,843.33 
PV of par value = Par value * (1 + r)-n 
PV of par value = 41,000 * (1 + 0.0845/2)-8 = $28,161.60 
Make-whole call price = PV of coupon payments + PV of par value 
Make-whole call price = $14,843.33 + $28,161.60 = $42,004.93

Therefore, the answer is D) $1,018.34, which is the nearest option to $42,004.93.

ABC Inc Has Bonds Outstanding That Are Calling Today Under the the Make-Whole