Question

A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?(Assume annual interest payments.)

A. $55
B. $220
C. $1000
D. $1055

Answer 1

D. $1055

Step-by-step explanation:

A callable bond is a type of bond on which the issuer has the right to repurchase it back or redeem. Unlike investors of an ordinary coupon bond, investors of a callable coupon bond tend to receive a higher return on their investment when the bond is redeemed by the issuer. In this case, the bondholder will receive an amount totaling to;

Original face value of bond + call premium

Face value = $1,000

Call premium = one year coupon payment = 5.5%*1000 = $55

Total amount = $1,000 + $55 = $1,055