Ted owns a bond which is callable in 2.5 years. The bond has a 6 percent coupon,

Question

Ted owns a bond which is callable in 2.5 years. The bond has a 6 percent coupon, pays interest semiannually, has a par value of $1,000, and has a yield to call of 6.3 percent. What is the call premium if the bond currently sells for $1,044.54? Hint: Call premium is the difference between call price and par value.

A. $50

B. $60

C. $70

D. $75

E. $80

Cochran's Furniture Outlet is issuing 25-year, 9 percent callable bonds. These bonds are callable in 4 years with a call premium of $45. The bonds are being issued at par and pay interest semi-annually. What is the yield to call?

A. 9.94 percent

B. 10.72 percent

C. 11.00 percent

D. 11.47 percent

E. 12.08 percent

A 6 percent, semiannual coupon bond has a yield to maturity of 7.4 percent and a Macaulay duration of 5.7. The bond has a modified duration of _____ and will have a _____ percentage increase in price in response to a 25 basis point decrease in the yield to maturity.

A. 5.4829; 1.35

B. 5.4966; 1.32

C. 5.4966; 1.37

D. 5.3073; 1.33

E. 5.3073; 1.38

Explanation / Answer

Ted Details Years to call                        2.50 Assume call value =C Market Price =                1,044.54 Yearly coupon                            60 Yield to call   6.3% Yield to Call= [ Annual Inerest+(Call price-Market Price)/Years to call]/(Call Price+Market Price)/2 0.063=[60+(C-1044.54)/2.5]/(C+1044.54)/2 0.0315C+32.903=60+0.400C-417.82 C =1060.30 So Call premium is Call value-Par value= $                        60 Correct option is B Cochran's Furniture Details Amt Bond Par value                      1,000 Bond Market Price                      1,000 Years to call                              4 Yearly coupon                            90 Call Price                      1,045 Yield to Call= [ Annual Inerest+(Call price-Market Price)/Years to call]/(Call Price+Market Price)/2 =[90+(1045-1000)/4]/(1000+1045)/2 YTC is close to 9.94% So correct optiob is A YTM = 7.40% Semi Annual YTM = 3.70% Macaulay's Duration                        5.70 Normal Duration = Macaulay's Duration/(1+ YTM per coupon period)     =5.7/1.037=                    5.4966 % change in price=-Normal Duration*% change in interest Change in interest =25 basis point= 0.25% % Change in Price= -5.4966*0.25%= -1.37% So Option C is correct.

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