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Rey G. Parcon, MBA, CFMP, AFA

COURSE CODE: COURSE DESCRIPTION: LECTURE No.:

 Callable bonds allow the issuer to pay off the loan
(redeem the bond) prior to the maturity date,
 Problem is presented with respect to the calculation of
the purchase price, since the term of the bond is not
certain.
 The investor will pay the price that will guarantee him
his desired yield regardless of the call date.
 In determining the price, he must assume that the
issuer of the bond will exercise his call option to the
disadvantage of the investor.
 Ifthe yield rate is greater than
the coupon rate or , the
investor must calculate using the
latest possible call date.
 The ABC Corporation issues a 20-year, P1 000 bond
with coupons at . The bond can be called, at
par, after 15 years. Find the purchase price to yield
13% compounded semiannually.
Given:
 F = We must calculate the two
 r = purchase prices that correspond
 C = to the two possible redemption
 i = dates.
 If
the yield rate is less than the
coupon rate or , the investor
must calculate using the earliest
possible call date.
 The ABC Corporation issues a 20-year, P1 000 bond
with coupons at . The bond can be called, at
par, after 15 years. Find the purchase price to yield
11% compounded semiannually.
Given:
 F = We must calculate the two
 r = purchase prices that correspond
 C = to the two possible redemption
 i = dates.
 The investor can determine all possible
purchase prices corresponding to his
desired yield, and then pay the lowest of
them.
 The ABC Corporation issues a 20-year, P1 000 bond
with coupons at . The bond can be called, at
P1 050, after 15 years, otherwise, the bond will mature
at par in 20 years. Find the purchase price to yield 11%
compounded semiannually.
Given:
 F = We must calculate all possible
 r = purchase prices that correspond
to the possible redemption
 C =
dates.
 i =
 A P5,000 callable bond pays interest at and
matures at par in 20 years. It may be called at the end
of years 10 to 15 (inclusive) for P5,200. Find the price
to yield at least until redemption.