Will owns a bond with a make-whole call provision. The bond matures in 14 years but is being called today. The coupon rate is 9 percent with interest paid semiannually. What is the current call price if the applicable discount rate is 7.5 percent and the make-whole call provision applies?

Question

Quizplus · Accepted Answer

To calculate the make-whole call price, we need to find the present value of the remaining cash flows of the bond, which includes the semi-annual coupon payments and the maturity value.

Step 1: Calculate the semi-annual coupon payment:
Coupon payment = (9% / 2) x $1,000 = $45

Step 2: Calculate the number of semi-annual periods remaining:
Time remaining = 14 years x 2 = 28 semi-annual periods

Step 3: Calculate the present value of the remaining coupon payments using the discount rate:
PV of coupons = $45 x [1 - (1 + 0.075/2)^(-28)] / (0.075/2) = $690.43

Step 4: Calculate the present value of the maturity amount:
PV of maturity = $1,000 / (1+0.075/2)^28 = $438.23

Step 5: Add the present values of the cash flows to get the make-whole call price:
Make-whole call price = PV of coupons + PV of maturity = $690.43 + $438.23 = $1,128.66

Therefore, the answer is E.

Will Owns a Bond with a Make-Whole Call Provision