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A company has an 8% bond that has a face value of $1,000 and matures in 30 years. Assume that coupon payments are made semi-annually. The bonds are callable after 15 years at 108% of par value. What is the value of the bond if rates drop immediately to 6%?a. $1,277b. $2,192c. $1,452d. $1,229e. $602

User Melaos
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1 Answer

5 votes

Answer:

a) 1,277 dollars

Step-by-step explanation:

We have to solve for the present value of the coupon payment and maturity art the end of the bond life discounted at 6% annual rate:

Coupon payment


C * (1-(1+r)^(-time) )/(rate) = PV\\

Coupon payment: 1,000 x 8% / 2 = 40

time 30 years x 2 = 60

market rate = 6% / 2 = 0.03


40 * (1-(1+0.03)^(-60) )/(0.03) = PV\\

PV $1,107.0225

Maturity


(Maturity)/((1 + rate)^(time) ) = PV

Maturity 1,000.00

time 60.00

rate 0.03


(1000)/((1 + 0.03)^(60) ) = PV

PV 169.73

PV coupon $1,107.0225

PV maturity $ 169.7331

Total $1,276.7556

User IronBlossom
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