Question

You own a bond with a 5.6 percent coupon rate and a yield to call of 6.5 percent. The bond currently sells for $1,096. If the bond is callable in five years, what is the call premium of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Call premium $

Answer 1

The call premium of the bond is $96.

Step-by-step explanation:

To calculate the call premium of the bond, you need to subtract the bond's current market price from its call price.

In this case, the bond sells for $1,096 and is callable in five years.

The call price is usually the bond's face value, which is $1,000. So, the call premium would be $1,096 - $1,000 = $96

Answer 2

The call premium of the bond is $60.60.

We have to get bond's call price which is the price at which the issuer can redeem it. We can use the yield to call (YTC) to find this.

YTC = (Annual Interest Payment + (Call Price - Current Price) / Number of Years to Call) / ((Call Price + Current Price) / 2)

6.5% = (0.056 * $1,000 + (Call Price - $1,096) / 5) / (($1,000 + $1,096) / 2)

0.065 = (56 + (Call Price - 1096) / 5) / (2096 / 2)

0.065 = (56 + (Call Price - 1096) / 5) / 1048

0.065 * 1048 = 56 + (Call Price - 1096) / 5

68.12 = 56 + (Call Price - 1096) / 5

68.12 - 56 = (Call Price - 1096) / 5

12.12 = (Call Price - 1096) / 5

5 * 12.12 = Call Price - 1096

60.6 = Call Price - 1096

Call Price = 1096 + 60.6

Call Price = $1,156.60

Call Premium = Call Price - Current Price

Call Premium = $1,156.60 - $1,096

Call Premium = $60.60

So, the call premium of the bond is $60.60.