Make whole provision

Asked by maham237 @ in Business viewed by 237 People

Will owns a bond with a make-whole call provision. The bond matures in 13 years but is being called today. The coupon rate is 8.25 percent with interest paid semiannually. What is the current call price if the applicable discount rate is 7.75 percent and the make-whole call provision applies

Answered by maham237 @


Answer:

Total Current Call Price =$1,668.36

Explanation:

Calculation of Present value of bond's coupon payment that is lost by premature termination of bond:


PV = C / i [1 - 1 / (1 + i)^n]


C = Coupon amount = 1,000 x 8.25% = 82.50 / 2 = 41.25


n = Number of payment period = 13 x 2 = 26


i = Rate of Interest= 7.75 / 2 = 3.875%


PV = 41.25 / 0.03875 [1 - 1 / (1 + 0.03875)^26] = $668.36


Add: Face value = 1,000


Total Current call price = 668.36 + 1,000 = $1,668.36


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