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Take advantage of a decrease in interest rates

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1. Septra, Inc. has a corporate bond issue outstanding that has 12 years remaining to maturity, semiannual coupon payments, a coupon rate of 12% per year and a yield-to-maturity of 7.65% per year. The next coupon payment is exactly six months away. Each bond has $1000 face value.

a) Price an individual bond.

b) The company is considering replacing this bond issue to take advantage of a decrease in interest rates. The company has the ability to 'call' each bond for a 10% premium over face value, i.e., each $1000 bond can be repurchased by the company for $1100. If a new 12 year bond issue can be made (at par) by the company at the same yield-to-maturity of 7.65%, should the company replace the bond? Show your work.

Reference no: EM132764629

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