Question

An 8 percent corporate coupon bond is callable in seven years for a call premium of one year of coupon payments. If the par value is $1,000, what's the price paid to the bondholder if the issuer calls the bond?

A. $920
B. $1,080
C. $1,160
D. $1,040

Answer 1

The price paid to the bondholder when the issuer calls an 8% corporate coupon bond callable in seven years with a call premium of one year of coupon payments is $1,080. This is calculated by adding the par value of $1,000 to the call premium equivalent to one year's coupon payment of $80.

Step-by-step explanation:

The question deals with the price paid to a bondholder when a corporate bond is called. A corporate coupon bond with a face value of $1,000 and a coupon rate of 8% is callable in seven years, and the call premium is equivalent to one year of coupon payments. To calculate the call price, we add the call premium to the par value of the bond:

• Face value (par value): $1,000
• Coupon payment for one year (8% of $1,000): $80
• Call premium: $80
• Total call price: Face value + Call premium = $1,000 + $80 = $1,080

Therefore, the price paid to the bondholder when the issuer calls this bond is $1,080.