Question

A 30-year 6% callable corporate bond with a face value of $10,000 was issued in June of 2000. It is now June of 2015, the call protection has expired, and the bond can be immediately called at a call price of 102% of par. As of today, similar bonds trade to yield 3%. How much would the issuer have to pay to the existing bondholders if they were to call the bond? Express your answer in dollars and cents. Do NOT enter the dollar sign

Answer 1

Answer:

13,581.38

Explanation:

We have to calculate the bond's present value using 3% as a discount rate. I will use an excel spread sheet and the NPV function:

• n = 15 years
• payments 1 - 14 = $600
• payment 15 = $10,600
• r = 3%

=NPV(3%, 14 payments of 600, 10600) = $13,581.38

The market value of the bond is $13,581.38, so if the issuer wants to call the bonds, they will need to offer much more than the $10,200 call price since no one would sell them for an amount below their market value.