Question

Will owns a bond with a make-whole call provision. The bond matures in 13 years but is being called today. The coupon rate is 8.25 percent with interest paid semiannually. What is the current call price if the applicable discount rate is 7.75 percent and the make-whole call provision applies? What would be the new price of the bond if the coupon rate is adjusted down to 7.75%? Please show all you work.

Answer 1

Bond price today is $1,040.51

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (3.875%,26 periods)	$                         41.25	16.20269	$                668.36
Present value of bond face amount -Present value (3.875%,26 periods)	$                    1,000.00	0.37215	$                372.15
Bond price			$             1,040.51

Interest amount:
Face value	1,000
Coupon/stated Rate of interest	8.250%
Frequency of payment(once in)	6 months
Interest amount	1000*0.0825*6/12=		$                  41.25
Present value calculation:
yield to maturity/Effective rate	7.75%
Effective interest per period(i)	0.0775*6/12=		3.875%

If coupon rate is 7.75% then bond price today is $1,000

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (3.875%,26 periods)	$                         38.75	16.20269	$                627.85
Present value of bond face amount -Present value (3.875%,26 periods)	$                    1,000.00	0.37215	$                372.15
Bond price			$             1,000.00

Interest amount:
Face value	1,000
Coupon/stated Rate of interest	7.750%
Frequency of payment(once in)	6 months
Interest amount	1000*0.0775*6/12=		$                  38.75
Present value calculation:
yield to maturity/Effective rate	7.75%
Effective interest per period(i)	0.0775*6/12=		3.875%

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