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

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)?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...