If a bond's call premium is $630 and its call price is $240, what is the bond's face value _____________?
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Answer: C. 390
Explanation
Face value is found by subtracting the call premium from the call price in standard problems. Performing the subtraction using the given figures yields the correct face value of three hundred ninety. This relationship ensures consistency between the bond's redemption price and its underlying par components. The call price is the total amount an issuer pays to retire a callable bond before maturity. The call premium represents the extra compensation paid to investors for taking early redemption risk. The fundamental bond identity links call price, face value, and call premium mathematically.
Corporate finance students practice these calculations to master bond pricing mechanics and terminology. Issuers evaluate these premium costs when deciding whether to refinance debt in a falling interest rate environment. Understanding these figures helps investors evaluate the true yield-to-call returns on callable securities. 0.0263 is an incorrect decimal result stemming from improper mathematical operations on the inputs. 870 is the sum of the call price and premium rather than the correct arithmetic difference. 2.63 represents an erroneous ratio rather than the correct calculated face value amount.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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