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# Price of a bond with call provision

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Zabberer Corp bonds pay coupon rate of 12% annual interest and maturity value of \$1000. Bonds are scheduled to mature at end of 14 years. Company has the option to call the bonds in 8 years at a premium of 12 % above maturity value
You believe company will exercise its option to call the bonds at that time. If you require a pretax of 10% on bonds of this risk, how much would you pay for one of these bonds today?

#### Solution Preview

Zabberer Corp bonds pay coupon rate of 12% annual interest and maturity value of \$1000
Bonds are scheduled to mature at end of 14 years
Company has the option to call the bonds in 8 years at a premium of 12 % above maturity value
You believe company will exercise its option to call the bonds at that time. If you require a
pretax of 10% on bonds of this risk, how much would you pay for one of these bonds ...

#### Solution Summary

The solution calculates the price of a bond with a call provision.

\$2.19
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## Call provisions, sinking fund, interest rate risk and reinvestment risk

Briefly discuss what are call provisions, sinking fund, interest rate risk and reinvestment risk. Which of these provisions make bonds more or less risky?

Support with examples from the real business case.

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