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Exercise
ABy Admin
Nov 19'23
Answer
Solution: B
Since the bond is bought at a premium and redemption will occur to the investor’s greatest disadvantage, assume the bond is called at the earliest possible redemption date, or simultaneous with the coupon payment occurring at the end of the 15th year. The cash flows then become a bond paying semiannual coupons of 40 for 15 years and returning 1000 at the end of the 15 th year. At a yield of 7% effective annually:
[[math]]
\begin{aligned}
& 1.07=\left[1+\frac{i^{(2)}}{2}\right]^2 \\
& \frac{i^{(2)}}{2}=0.034408 \\
& P=40 a_{\overline{30}|}+1000 v^{30} \\
& P=1103.61
\end{aligned}
[[/math]]
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