An extendable bond has the following features: Principal $1,000 Coupon 9.5% ($95

ID: 2638923 • Letter: A

Question

An extendable bond has the following features:

Principal $1,000

Coupon 9.5% ($95 annually)

Maturity 8 years but the issuer may extend the maturity for 5 years.

A.) If comapriable yields are 12 percentm what will be the price of the bond if investors anticipate that it will be retired after eight years?

B.) What impact will the expectation that the bond will be retired after 13 years have on its current price if comparable yields are 12 percent?

C.) If comparable yield remain 12 percent, would you expect the firm to retire the bond after eight years?

Hi,

Please find the detailed answer as follows:

Part A:

Nper = 8 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 12% (indicates the rate)

PMT = 95 (indicates the amount of interest payment)

Price of the Bond = PV(Rate,Nper,PMT,FV) = PV(12%,8,95,1000) = $875.81

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Part B:

Nper = 13 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 12% (indicates the rate)

PMT = 95 (indicates the amount of interest payment)

Price of the Bond = PV(Rate,Nper,PMT,FV) = PV(12%,13,95,1000) = $839.41

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Part C:

Yes, since the price is higher with 8 years than it is after 13 years.

Thanks.

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