Assume that a callable bond’s call period starts two years from now with a call price of $102.50. Also assume that the bond pays an annual coupon of 6 percent and the term structure is flat at 5.5 percent. Which of the following is the price of the bond assuming that it is called on the first call date? A) $103.17. B) $100.00. C) $102.50. D) $104.54. The correct answer was A. The bond price is computed as follows: Bond price = 6/1.055 + (102.50 + 6)/1.0552 = $103.17 Guys i have seen a couple of question where they assume call price to be the upper limit on bond price. But here bond price is above call price. Is it b/k bond is not currently callable? Pls suggest.

just do this as a TVM problem. N =2 I/Y =5.5 FV = 102.50 Pmt = 6 PV = 103.17 Question is just looking for the current price of the bond assuming it gets called at 102.50 in 2 years.

jutt thanks for the alternate solution. sumit - Remember that the call date is still two years out.

Thanks… Thats what i was thinking…