Google CEO Sundar Pichai purchased a bond that has 5% coupon with 4 yrs remaining maturity for $102. Face value is 100.  Coupon is paid on a semiannual basis.  The bond is callable in 2 yrs and onward. The strike prices (call schedule) are given next: 101.5 (yr 2), 101 (yr 3), and 100 (yr 4) Which of the following is most likely to be the bond’s annual effective yield to second call? a.4.26% b.4.38% c.4.56% d.4.64%

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Google CEO Sundar Pichai purchased a bond that has 5% coupon with 4 yrs remaining maturity for $102. Face value is 100.  Coupon is paid on a semiannual basis.  The bond is callable in 2 yrs and onward. The strike prices (call schedule) are given next: 101.5 (yr 2), 101 (yr 3), and 100 (yr 4)

Which of the following is most likely to be the bond’s annual effective yield to second call?

a.4.26%

b.4.38%

c.4.56%

d.4.64%

Expert Solution
Given Information:

Coupon rate is 4%

Time to maturity is 4 years

Price of bond is $102

Face Value is 100

Callable after 2 years

Callable price in second year is 101.5

Callabe price in second call is 101

To Find:

  • Effective yield to call
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