Question

You own a bond with the following features: Face value of $1000, Coupon rate of 6% (annual) 12 years to maturity. The bond is callable after 6 years with the call price of $1,070. If the market interest rate is 4.32% in 6 years when the bond can be called, if the firm calls the bond, how much will it save or lose by calling the bond? State your answer to the nearest penny (e.g., 84.25) If there would be a loss, state your answer as a negative (e.g., -37.51)

Answer 1

Calculating Price of Bond at the time of call,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 60, N = 6, I = 0.0432]

PV = $1,087.16

Amount saved = Price of Bond - Call Price

Amount saved = 1,087.16 - 1,070

Amount Saved = $17.16