Revision as of 21:16, 19 November 2023 by Admin (Created page with "You have decided to invest in a newly issued 20-year bond with annual coupons and the following characteristics: #The price at issue is 1321. #The face amount is 1111. #The annual coupon rate is 10%. #The bond is callable for 1111 immediately after the payment of either the 18 th or 19th coupon. Calculate the minimum possible annual effective yield rate that you can earn. <ul class="mw-excansopts"><li>7.881%</li><li>7.937%</li><li>7.985%</li><li>8.028%</li><li>8.065%<...")
ABy Admin
Nov 19'23
Exercise
You have decided to invest in a newly issued 20-year bond with annual coupons and the following characteristics:
- The price at issue is 1321.
- The face amount is 1111.
- The annual coupon rate is 10%.
- The bond is callable for 1111 immediately after the payment of either the 18 th or 19th coupon.
Calculate the minimum possible annual effective yield rate that you can earn.
- 7.881%
- 7.937%
- 7.985%
- 8.028%
- 8.065%
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
ABy Admin
Nov 19'23
Solution: C
The minimum yield will occur at the earliest redemption date since the bond is brought at a premium. Therefore [math]\mathrm{n}=18[/math].
[[math]]
\begin{aligned}
& 1321=111.10 a_{\overline{18} \mid i}+1111 v^{18} \\
& i=0.07985
\end{aligned}
[[/math]]
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.