Question

Consider a 5% callable bond with 20 years maturity and 8% yield which pays the face value plus 10% if it is redeemed before maturity. If after 10 years the bond is redeemed, find an upper bound for the yield at that time. Assume that coupon payments are made once per year.

Answer 1

Solution

	Assume face Value=	$1,000
	Coupon payment per year	$50	(1000*0.05)
	Number of years	20
	Yield	8%
	Bond Price =Present Value of Future cash flows
	Bond Price	$705.46	(Using PV function of excel with Rate=8%, Nper=20, Pmt=-50, FV=-1000)
	Bond Price	$705.46
	Coupon payment per year	$50
	Number of years	10
	Amount received at the time of redemotion	$1,100	(1000*1.1)
	Yield	10.51%	(Using RATE function with Nper=10,Pmt=50, PV=-705.46, FV=1100)