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    diwanrayan's Avatar
    diwanrayan Posts: 10, Reputation: 1
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    #1

    Oct 18, 2009, 02:57 AM
    Callable Bonds
    Can anyone explain to me how to deal with the callable bonds? I mean to ask if a bond was issued which is callable at certain rate and is called then how to figure out the difference or the yield the investor got on that. Please explain in as simple words as possible.
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    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Oct 18, 2009, 02:10 PM
    1) Determine all the cash flows received by the bondholder, including the payoff (call) amount.

    2) The bondholder's yield during the holding period is that discount rate which makes the present value of these cash flows equal to the original price paid by the bondholder for the bonds.

    You'll have to use trial-and-error to zero in on the correct discount rate, or use a computer or calculator application such as Excel's Goal Seek to whip through the T-and-E passes for you.
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