(a) Introduction: A bond is a security that creates an obligation on the issuer to make a specified amount of payment to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price. In simple terms, it is the average rate of return a holder can expect from that bond. Callable bonds are those that will be redeemed back by the issuer before the maturity. To Discuss: A bond with a call feature: (1) Is attractive because the immediate receipt of principal plus premium produces a high return (2) Is more apt to be called when interest rates are high because the interest saving will be greater (3) Will usually have a higher yield to maturity than a similar no callable bond. (4) None of the above.

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Chapter 10, Problem 1CP

Summary Introduction

(a)

Introduction:

A bond is a security that creates an obligation on the issuer to make a specified amount of payment to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price. In simple terms, it is the average rate of return a holder can expect from that bond. Callable bonds are those that will be redeemed back by the issuer before the maturity.

To Discuss:

A bond with a call feature:

(1) Is attractive because the immediate receipt of principal plus premium produces a high return

(2) Is more apt to be called when interest rates are high because the interest saving will be greater

(3) Will usually have a higher yield to maturity than a similar no callable bond.

(4) None of the above.

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