Revision as of 18:01, 19 November 2023 by Admin (Created page with "'''Solution: E''' Given the coupon rate is less than the yield rate, the bond sells at a discount. Thus, the minimum yield rate for this callable bond is calculated based on a call at the latest possible date because that is most disadvantageous to the bond holder (latest time at which a gain occurs). Thus, X, the par value, which equals the redemption value because the bond is a par value bond, must satisfy <math display = "block"> \mathrm{Price} = 1021.50=0.02\,X a_{...")
Exercise
ABy Admin
Nov 19'23
Answer
Solution: E
Given the coupon rate is less than the yield rate, the bond sells at a discount. Thus, the minimum yield rate for this callable bond is calculated based on a call at the latest possible date because that is most disadvantageous to the bond holder (latest time at which a gain occurs). Thus, X, the par value, which equals the redemption value because the bond is a par value bond, must satisfy
[[math]]
\mathrm{Price} = 1021.50=0.02\,X a_{\overline{200}|0.03}^{}+X v^{20}_{0.03}=0.851225\,X\Rightarrow X=1200.
[[/math]]
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.