Lambert Energy Bhd issued a 5% bond with 10 years to maturity three years ago. The bond is callable after 6 years of issuing. The par value of the bond is RM1,000. The call price at year 6 will be at a premium of two-year coupon payment of which the coupon rate has been reduced by 1%.

Required:

i)Calculate the straight bond price if the required rate of return is 8%.

(3 marks)

ii)Determine the maximum price if the bond is to be called in year 6.

(3 marks)

iii)Advise on the risk of callable bonds to investors.