Question

A bond with 25 years to maturity, 7% coupon, quoted on a 6.25% basis is callable in 10 years at 103, 15 years at 102, and 20 years at par. On the customer's confirmation, the dollar price quoted must be based on:

Answer 1

Answer: 10 years to call

Explanation:

Maturity period = 25 years

Coupon rate = 7%

6.25% basis is,

• Callable in 10 years at 103

• Callable in 15 years at 102

• Callable in 20 years at par

This bond is considered as premium bond. Therefore, in case of premium bonds, Yield to call will be lower than the yield to maturity. Here, the question is which call date should be utilized. According to the rule of thumb, it states that always use the term that is nearest to the whole call date.

Hence, on the customer's confirmation, the dollar price quoted must be based on 10 years to call.