Coupon is paid continuously with an annual coupon rate

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Reference no: EM13873328

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 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 Year 7,8, and 9 were 1100, 1050, 1025, respectively. What are your answers now to a) and b)?

Reference no: EM13873328

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