A $1,000 bond has a coupon rate of 10 percent and matures after eight years. Interest rates are...

Question

A $1,000 bond has a coupon rate of 10 percent and matures after eight years. Interest rates are currently 7 percent.
a) What will the price of this bond be if the interest is paid annually?
b) What will the price be if investors expect that the bond will be called with no call penalty after two years?
c) What will the price be if investors expect that the bond will be called after two years and there will be a call penalty of one year’s interest?
d) Why are your answers different for questions (a), (b), and (c)?

David · Accepted Answer

d) 
The price fluctuates because of the fluctuation in the interest rate, and the covenants attached with the 
bonds. The interest rate declines and as a result, the bond price increases. In case (b), the bond is called 
without a penalty, and in case (c), the bond is called with a penalty,

A $1,000 bond has a coupon rate of 10 percent and matures after eight years. Interest rates are currently 7 percent. a) What will the price of this bond be if the interest is paid annually? b) What...

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