In: Finance
Consider a $100 par value 8% bond with semiannual coupons called at $106.50 on any coupon date starting 4 years after issue for the next 2 years, at $102 starting 6 years after issue for the next 2 years, and maturing at $100 at the end of 8 years.
(a) Find the highest price which an investor can pay and still be certain of a yield of 6% convertible semiannually.
(b) Assuming the price paid in part (a), compute the nominal yield convertible semiannually the purchaser would earn if the bond was not called.
Part (a):
Priceis calculated using the PV function of Excel.
Highest price to be paid, still certain of 6% yield convertible semi annually= $113.95
Detailed computation as follows:
Part (b):
Nominal yield convertible semi annually if purchased at the above price and not called= 5.796369%
Details as follows: