Question

In: Finance

Consider a $100 par value 8% bond with semiannual coupons called at $106.50 on any coupon...

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.

Solutions

Expert Solution

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:


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