Fundamentals of Financial Management. Expected interest rate Problem. 14% ccoupon rate, semiannual pmt....?

14% coupon rate, semiannual pmt, $1000 par value bonds, which matures in 30 yrs, are callable 5 yrs from today at $1050.00. They sell at a price of $1353.54. yield curve is flat, assume interest rates stay current level.

A. What is the best estimate of these bonds' remaining life?
B. If they plan to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

a. Estimated remaining life is 5 years because of the call option that is waaaaaaaaaaaaaaaaaaaaaaay in the money, which makes it almost certain to be called by the issuing entity.

b. This is a YTM answer for the previous question. Since the bond was callable at 5 years and it so in the money that I am going to ignore the convexity of the option price since it is so linear.
N = 10 semi annual periods
PMT = 1,000 x (14%/2) = $70
PV = -$1,353.54
FV = 1,000
Compute: I/R
I/R = 2.8806
To annualize and turn it into YTM, then 1.028806^2 -1 = 5.84%.

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