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September 1998 Q4

D

DevonMatthews

Member
Can someone explain this type of question? I dont understand how to work it out
 
Do you understand what to do when the issuer has the option to redeem the bond when he wants?

At issue, the coupons are 8% but the GRY is 6%.
So you would expect that the issuer would want to switch to 6% instead of 8% sooner rather than later.

After 10 years the yields at the time are now 10%.
But issuer is paying 8% so now would want to delay redemption.

So that's the first part.

Then you can look at the equation of value for the price you paid at start and see that by delaying redemption the GRY goes up.
 
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