D. Any monies left after expenses is known as profit
Answer:
Option B has a higher present value at time zero is correct
as shown below:
Option A future value at the end of three years = 2000*(1.06)^2+5000*(1.06)^1+5000*(1.06)^0= $12,547
Option B future value at the end of three years = 4000*(1.06)^2+4000*(1.06)^1+4000*(1.06)^0=$12,734
Option B has higher future value as determined above, so first option is wrong.
Option A present value at time zero = 2000/(1.06)^1+5000/(1.06)^2+5000/(1.06)^3= $10,535
Option B present value at time zero = 4000/(1.06)^1+4000/(1.06)^2+4000/(1.06)^3=$10,692
Option B has higher present value as determined above, so second option is correct.
Third option is wrong as Option B is not perpetuity as B has three years life.
Fourth option is wrong as Option A is not ANNUITY as A CASH FLOW amounts is not equal , it varies on annual basis.
Answer:
The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond.
Explanation:
In simple words, callable bonds refers to the bonds with a special embedded option. In such bonds, the issuer have the right to buy back these bonds at a predetermined price after a certain lockout period.
Obviously such bonds are less attractive for bondholders as the issue will only buy back these bonds when the rates in the market are low and bonds can be purchased at a lower value .
