Question

A 7% general obligation bond is issued with 20 years to maturity. A customer buys the bond on a 7.50% basis. The bond contract allows the issuer to call the bonds in 5 years at 102 1/2, with the call premium declining by 1/2 point a year thereafter. The bond is puttable in 5 years at par. The price of the bond to a customer would be calculated based on the:

A. 5 year call at 102 1/2
B. 5 year put at 100
C. 10 year call at 100
D. 20 year maturity

Answer 1

D. 20 year maturity.

Step-by-step explanation:

The bond has stated interest rate of 7% and the yield is 7.50% . The bond is sold at discount to its par value. The bond is issued for 20 years maturity and since it is at discount then the bonds will be held till maturity to improve yield on bonds. The price of the bond will be calculated based on 20 years maturity.