Question

Canada Call Price. A 7% corporate bond with 6 years to maturity has a Canada call. The bond's yield to maturity is 4.8%. The call price must offer an equivalent yield to a Canada Bond plus .35%. Currently, 6-year Government of Canada bonds are yielding 4%. Assume coupons are paid annually.

a) What is the current bond price?

b) What is the current call price?

Answer 1

Part a)

The current bond price can be calculated with the use of PV (Present Value) function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = Interest Rate, Nper = Period, PMT = Payment (here, Coupon Payment) and FV = Future Value (here, Face Value of Bonds).

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Here, Rate = 4.8%, Nper = 6, PMT = 1,000*7% = $70 and FV = $1,000

Using these values in the above function/formula for PV, we get,

Current Bond Price = PV(4.8%,6,-70,1000) = $1,112.38

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Part b)

The current call price can also be calculated with the use of PV (Present Value) function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = Interest Rate, Nper = Period, PMT = Payment (here, Coupon Payment) and FV = Future Value (here, Face Value of Bonds).

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Here, Rate = 4%+.35% = 4.35%, Nper = 6, PMT = 1,000*7% = $70 and FV = $1,000

Using these values in the above function/formula for PV, we get,

Current Call Price = PV(4.35%,6,70,1000) = $1,137.35