The ABC Corporation Issues a 20-Year $1000 Par Value Bond

The ABC Corporation issues a 20-year $1000 par value bond with bond interest at j₂ = 6%.The bond is callable as early as the end of 10 year at $1100.The price of the bond to yield j₂ = 5% is
• $1125.51 assuming the bond is held to maturity.
• $1138.97 assuming the bond is called at the end of 10 years.
In which of the following situations would the actual yield rate more than 5%?
(i) An investor pays $1138.97 for the bond and it is held to maturity;
(ii) An investor pays $1125.51 for the bond and it is called at the end of 15 years.

A) (i) only
B) (ii) only
C) Both (i) and (ii)
D) Neither (i) or (ii)

Correct Answer:

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