A 10,000 par value bond with 10% semiannual coupons is callable at 9, 250 starting threeyears after its issue, at 9,600 starting five years after its issue, and will mature at parafter ten years. An investor purchased the bond assuming they will have a yield rate ofat least 8% convertible semiannually regardless of the call date. Eight years after issue,the borrower decided to call the bond. Use the bond salesman's formula to approximatethe investor's actual yield rate (convertible semiannually) after the bond is called. Whenpricing the bond, assume that it can only be called on a coupon date.

Part 2:Explanation:Step 1: Calculate the yield-to-call at each call date:- At the first call date…

Answered: A 10,000 par value bond with 10%…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You wish to sell a bond that has a face valueof $5,000. The bond bears an interest rate of 7.5%,which is payable quarterly. Six years ago, the bondwas purchased at $4,800. At least a 9% annual returnon the investment is desired. What must be the minimum selling price of the bond now in order to makethe desired return on the investment?
A well-known industrial firm has issued $1000 bonds with a 3% coupon interest rate paid semiannually. The bonds mature 10 years from now. From the financial pages of your newspaper you learn that the bonds may be purchased for $800 each ($795 for the bond plus a $5 sales commission). What nominal and effective annual rate of return would you receive if you purchased the bond now and held it to maturity 10 years from now?
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