Question

The problem refers to the bonds of The Apollo Corporation, all of which have a call feature. The call feature allows Apollo to pay off bonds anytime after the first 15 years, but requires that bondholders be compensated with an extra year's interest at the coupon rate if such a payoff is exercised.

Apollo's Alpha bond was issued 10 years ago for 30 years with a face value of $1000. Interest rates were very high at the time, and the bond's coupon rate is 20%. The interest rate is now 10%. Assume bond coupons are paid semiannually.

1. At what price should an Alpha bond sell? Round the answer to the nearest cent.
   $   
   
2. At what price would it sell without the call feature? Round the answer to the nearest cent.
   $   

Answer 1

	a	SELLING PRICE OF BOND=Present Value of future Cash Flows
		Face Value of Bond	$1,000
	Rate	Current Semi annual Interest Rate=(10/2)%	5%
	Nper	Number of Semi annual periods to call=5*2	10
	Pmt	Semi annual Coupon Payment =(1000*20%)/2	$100
	Fv	Payment at call=1000+20%*1000	$1,200
	PV	Selling Price of Bond	$1,508.87
		(Using PV function of excel)
	b	SELLING PRICE WITHOUT CALL FEATURE
	Rate	Current Semi annual Interest Rate=(10/2)%	5%
	Nper	Number of Semi annual periods to maturity=20*2	40
	Pmt	Semi annual Coupon Payment =(1000*20%)/2	$100
	Fv	Payment at maturity	$1,000
	PV	Selling Price of Bond	$1,857.95
		(Using PV function of excel)