Revision as of 18:00, 19 November 2023 by Admin (Created page with "'''Solution: B''' Because 40/1200 is greater than 0.03, for early redemption the earliest redemption should be evaluated. If redeemed after 15 years, the price is <math display = "block">40a_{\overline{40}|0.03} + 1200/1.03^{30} = 1278.40</math>. If the bond is redeemed at maturity, the price is <math display="block">40a_{\overline{40}|0.03} + 1100/1.03^{40} = 1261.80</math>. The smallest value should be selected, which is 1261.80. (When working with callable bonds, the...")
Exercise
ABy Admin
Nov 19'23
Answer
Solution: B
Because 40/1200 is greater than 0.03, for early redemption the earliest redemption should be evaluated. If redeemed after 15 years, the price is
[[math]]40a_{\overline{40}|0.03} + 1200/1.03^{30} = 1278.40[[/math]]
. If the bond is redeemed at maturity, the price is
[[math]]40a_{\overline{40}|0.03} + 1100/1.03^{40} = 1261.80[[/math]]
. The smallest value should be selected, which is 1261.80. (When working with callable bonds, the maximum a buyer will pay is the smallest price over the various call dates. Paying more may not earn the desired yield).
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.