Question: A bond has the following terms: Principal ....... amount $1,000 Annual interest payment ...$140 starting after five years have passed (i.e., in year 6) Maturity

A bond has the following terms:

Principal ....... amount $1,000

Annual interest payment ...$140 starting after five years have passed (i.e., in year 6)

Maturity ....... 12 years

Callable at $1,140 (i.e., face value +1 one year’s interest)

a) Why do you believe that the terms were constructed as specified?

b) What is the bond’s price if comparable debt yields 12 percent?

c) What is the bond’s current yield?

d) Even though interest rates have fallen, why may you not expect the bond o be called?


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