Given the following information on a callable bond:

 Coupon rate = 10% (annual), with payments made annually

 Face value = F = $1,000

 Maturity = 5 years

 Callable at $1,100

 YTM on a similar noncallable bond = 10%

 Annualized standard deviation of the noncallable bond’s logarithmic return = .15

 Continuously compounded annual risk-free rate = 5%

Questions:

a. What is the value of the noncallable bond?

b. Using the B-S OPM, what is the value of the callable bond’s call feature to the issuer? Use the B-S Excel program found on the Web site.

c. What is the value of the callable bond?