I was doing some mocks from Kaplan CFA
the question say the bond is a 3 yr bond and callable at par ($100) in 1 year
Since the call value for a callable bond is = min(call value, price not called), why was the bond never called at maturity (i.e., year 3). I am confused, the only reason im thinking is that the meaning of “only callable in 1 year” means only callable in yr 1 instead of callable beginning from 1 year from now
It is not “called” at maturity it is paid off.
102 = par + 2 coupon
Call never called year 1
If it was callable from year 1 you would have call at year 2 in the lower leg., where you see 100.14
the answer calculated the value and say the bond was never called lol so confused
That’s right.
Also, a callable bond is a bond that the issuer has the right to call from investors. In this case, the market price of the bond of year 1 is less than 100, thus the issuer wouldn’t exercise the call right. Because they will pay 100 for the bond which has the market price of 99.78 or 99.76 if they exercise the call right in Y1.
What is the confusion here? The bond is only callable at year 1, so the bottom node at year 2 cannot be called, despite it being greater than 100.
When we take the values at the bottom and middle nodes at year 2, add their coupons, divide by 2, and discount by the bottom interest rate at year 1, we get a value lower than 100, so the issuer would not call the bond. Otherwise they would be buying back the bond at a higher price than its intrinsic value.
And?
That is correct becuase it was callable at year 1 price < call so they would not call.
