Exercise
ABy Admin
Nov 19'23
Answer
Solution: B
Because the yield is less than the coupon rate, the bond sells at a premium and the worst case for the buyer is an early call. Hence the price should be calculated based on the bond being called at time 16. The price is
[[math]]
100a_{\overline{{{16}}}|0.05}+1000(1.05)^{-16}=100(10.0378)+458.11=1542\,.
[[/math]]
(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.