Problem 5 The decision to call or not to call  

Suppose a bond with a face value of $1000, a coupon rate of 8% paid annually, with a maturity of 10 years. The bond can be called at the 5th year at a call price of $1080. Originally the interest rate was 9%. If just the first day after the emission of the bond the interest rate fall to 5%, what will happen?

1

Hint: Note that is the corporation who take the decision to call or not to call. Note that the price of the bond is the present value of the flow that will be paid by the corporation to the bondholder, then the lower the present value, the better for the corporation.

A. The bond will be called. B. The bond wont be called. C. Will the same. D. It is not possible to determine. 

Problem 6

Suppose that a bonds duration is 7.5 and interest rate is 8%. Calculate the volatility.

A. 93.75 B. 4.17 C. 9.41 D. 6.94 

Problem 7

Calculate the price of a bond issued on 2/14/2017, with maturity on 2/14/2027, with a coupon rate of 4.8% paid semiannually, 5% yield. Use the Excel Price function with basis=0. Assume face value of $1000. Hint: Remember that price is calculated assuming per $100 face value. Be careful with how to set the settlement (better read again Excel help).

A. $984.41 B. $984.34 C. $98.44 D. $98.43