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Section6.4567

# Section6.4567 - Callable Bonds(section 6.4 Callable bonds...

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Callable Bonds (section 6.4) Callable bonds are bonds that a bond issuer can pay back before the redemption date bond issuer will do so if interest rates fall they will replace the old bond issue with a new series of bonds which pay a lower bond interest rate From the investor’s point of view: the time to redemption is uncertain need to determine the price to pay to insure the investor earns the desired yield rate

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Example 6.4.1 A \$2000 bond with semi-annual coupons at j 2 = 8% is redeemable at par in 10 years. It is callable after 5 years. Determine the price an investor should pay to guarantee a yield of (a) j 2 = 7% (b) j 2 = 9% Solution to 6.4.1 For both (a) and (b), you need to calculate two prices: assuming bond is held to maturity assuming bond is called early
In General – For bonds callable at par 1. If i < r (bond sells at a premium), use the earliest possible call date in your price calculations 2. If i > r (bond sells at a discount), use the latest possible redemption date in your price calculations However For bonds that are callable at a premium, we cannot use the above rules we must calculate the various prices and pay the lowest one

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Example 6.4.2 A \$2000 bond at j 2 = 7% is redeemable at par in 20 years. It is callable at a 5% premium in 15 years. Determine the price to guarantee a yield of j 2 = 6%. Solution to 6.4.2
Price of a Bond Between Bond Interest Dates (section 6.5) So far we have been calculating the price of a bond assuming the bond was purchased on a bond coupon date in these cases, the seller keeps the coupon due on that date and the buyer receives all future coupons However, bonds can be bought/sold at any time

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In order to determine the price at which
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Section6.4567 - Callable Bonds(section 6.4 Callable bonds...

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