Consider a 10-year, $1000 coupon bond, redeemable at par, and assume that the coupon is pa
Consider a 10-year, $1000 coupon bond, redeemable at par, and assume that the coupon is paid
continuously with an annual coupon rate of 5%. The bond is said to be callable, if the borrower (the
issuer) can redeem the bond at a time prior to the maturity data. Suppose that, in this case, that it can be
called (at par, i.e. $1000) at the end of Year 7, 8 or 9. What price would you be willing to pay if:
(a) you required a yield rate of 6% ?
(b) you required a yield rate of 4% ?
(c) Suppose that instead, the redeemable amount in Years 7, 8 and 9 were 1100, 1050 and 1025,
respectively. What are your answers now to (a) and (b)?