You bought a $1,000 par GM callable bond in January 2020 that is callable in 2025...

You bought a $1,000 par GM callable bond in January 2020 that is callable in 2025 at par. It has a coupon rate of 3.2%/year. When is GM likely to call the bond?
You bought a $1,000 par Southern Company bond on April 1. The bond pays a coupon rate of 4%/year semiannually on December 1 and June 1. How much accrued interest did you pay?

Solutions

Expert Solution

1st part answer.

Bonds are likely to be called when the interest rate in market falls below the YTM of the bond when it was issued. So when GM issued the callable bond in January 2020, then the YTM of the bond was 3.2%. The bond is callable in 2025. So in the year 2025, if the YTM prevailing in market is less that 3.2%, then GM may call the bond. This concept is very simple, if GM finds that it is cheaper to raise new bonds from market as the interest rate that he will have to pay is less, then he will call the old bond and issue new bonds.

2nd part answer:

Coupon rate is 4% semiannually. The face value of the bond is $1,000. So 4% of $1,000 is $40 as semiannual,

so 40 / 2 = $20

The bond pays interest on 1st December and 1st June. You are buying the bond on st April. The person who was holding the bond got last coupon on 1st december. So after that he is holding the bond for 4 more months.

You need to pay him the accrued interest for 4 months.

$20 interest accrued for 6 months,

So for 4 months = 20 / 6 * 4

= $13.33

So the accrued interest for 4 months is $13.33

jeff jeffy answered 1 year ago

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