 Personal finance practice problem using OneNote, debentures that are callable price calculation. Prepare to get financially fit by practicing personal finance. You're not required to, but if you have access to OneNote, would like to follow along. We're in the icon left hand side, practice problems tab in the 11260 debentures that are callable price tab. Also take a look at the immersive reader tool, practice problems typically in the text area too with the same name, same number, but with transcripts. Transcripts that can be translated into multiple languages either listened to or read in them. Looking at the debenture type of bonds, we've got the face amount on the left hand side, $1,000. The coupon rate which we're going to use to calculate the payments that will be received, the annuity kind of portion of the bond type of investment at the 14%. The yield to maturity, which is in essence the market rate which would not be on the bond or determined from the bond, but determined in part by the market 8% due in years. So the maturity is going to be 15 years currently callable at $1,040. So this is basically the new thing that's throwing a bit of a wrench, a bit of a curve ball into our price calculation. We're going to say that they're going to be paying out semi-annual as opposed to annual. So when we calculate the price, we have a similar type of situation here when we're investing in the debenture type bond. We're still kind of thinking of it as if we're loaning money to the issuer of the debenture bond, that typically being a corporation or possibly a government entity. And we're going to be receiving for that interest payments. In this case, we're going to be receiving the interest payments at $1,000 times the 0.14, which would be the 140, but we're going to be receiving them semi-annual divided by 2. We're going to be getting the $70 semi-annual payments for the 15 years. And we're also going to be receiving the face amount at the end or maturity at the end of the 15 years, the $1,000. Now the added wrinkle that we have in play here is that it's callable. That's going to be an advantage for the person that's issuing the bonds because they can then buy back the bonds at that callable price. So if we are the investors purchasing bonds, then typically if the price were to go up over the callable amount, we're typically probably not going to be paying much more than that for the bonds because they can call them back for that amount. So when we're thinking about the price, we might be comparing to similar bonds, calculating the price and for a similar bond that doesn't have the callable option, for example. And then if the price goes over that amount, we're typically most likely going to cap it because if the price in reality were to go over that amount, it's likely that the issuer of the bond would call the bonds in order to in essence kind of refinance their debt at that point. So the calculation would look similar here. We say, okay, how would we calculate the price? We take the present value of the interest payments, which would be the present value of the rate. The rate is the market rate, the yield to maturity at the 8%, but we're going to divide it by two because that's a yearly rate. And we want the semi annual rate comma, the number of periods is going to be 15, but that's in years and we want in six month time frame. So we're going to multiply that times two comma. And then the payment is going to be the 1000 times the coupon rate 14 divided by two, which was 70. That's the annuity series of payments we're going to get for 15 years or 30 semi years, I should say 1000 to 10. Then we're going to take the present value of the $1000 lump sum we're going to get at the end here 15 years later. So negative present value, the rate is going to be then the yield to maturity divided by two. Number of periods is going to be the 15 times two comma, comma, because there's no payment because it's not an annuity present value of one. Future value then is going to be that $1000 bringing that 1000 back to the current period, valuing it at the 308 of out. That gives us the price for of 1005 19. That would be the price if there wasn't that callable capacity here, but given the fact that there is the callable capacity and the company could call it back at the 1004 for 10. Means we would think it would possibly cap at that 1004 10 market not being willing to pay much more than that because if it price goes up more than that you would expect then the issuer of the bond might enable their calling capacity at that point in time. So if you were to do this in Excel note that you might calculate this as kind of like the pre the pre price before you consider the call option. And then if this amount is less than the callable amount, you might say that's going to be the price and if it's over the callable amount, then you would have the cap on the call and you can practice an if logic function to do that. That's one way that you can use this calculation to figure that and then you can adjust your data on the left hand side. Imagine in the call option to be something like, for example, 1600, which would mean that the price would be the lower of in this case the 1005 19. You can also structure your data in Excel. Lastly, you could say this is the price with the no call here and this is going to be the current callable at or the call amount 1004 10 and if they're side by side you can use the men function to take the smaller of those two amounts helping to construct your Excel worksheets, which is always good practice in such a way that you can change the data on the left hand side run different scenarios and easily get a better understanding of the concepts being covered without recalculating everything and learn how to how to do Excel formatting. So check it out in Excel. We have it there too.