Chevalier Manufacturing issued a callable bond with a 2010 maturity date. The bond was sold at par and the call premium was set equal to the coupon rate of 20%. A declining call premium was also in place so that the premium declined evenly over the last ten years of premium to zero. What would be the call premium if the bond was called in 2001.

Question

Quizplus · Accepted Answer

The bond was issued with a 2010 maturity date and a declining call premium over the last ten years. Since the bond is being called in 2001, there are still nine years left until maturity, and therefore the declining call premium has only declined for one year. The initial call premium was set equal to the coupon rate of 20%, so the call premium in 2001 would be 20% x 9 years = 180%. Therefore, the correct answer is C.

Chevalier Manufacturing Issued a Callable Bond with a 2010 Maturity