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22 June, 19:31

A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)

A. $55

B. $220

C. $1000

D. $1055

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  1. 22 June, 21:07
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    D. $1055

    Explanation:

    A callable bond is a type of bond on which the issuer has the right to repurchase it back or redeem. Unlike investors of an ordinary coupon bond, investors of a callable coupon bond tend to receive a higher return on their investment when the bond is redeemed by the issuer. In this case, the bondholder will receive an amount totaling to;

    Original face value of bond + call premium

    Face value = $1,000

    Call premium = one year coupon payment = 5.5%*1000 = $55

    Total amount = $1,000 + $55 = $1,055
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