Non-Callable Bond

Study guide: Exam FM-2

A non-callable bond cannot be redeemed by the issuer before its stated maturity date. The bondholder receives all scheduled Coupon payments and the Redemption Value at maturity with certainty, eliminating call risk and reinvestment risk from early redemption.

• The price of a non-callable bond is straightforward:

P = Fr \cdot a_{\overline{n}|j} + C \cdot v^n

• With no uncertainty about the term n, non-callable bonds are simpler to analyze than Callable Bonds and are the baseline case for bond pricing on Exam FM.

Pricing a Non-Callable Bond A non-callable 1{,}000 face bond, redeemable at par, pays 7% annual coupons and matures in 8 years. Price at 5% yield.

Answer P = 70 \cdot a_{\overline{8}|5\%} + 1000(1.05)^{-8} = 70(6.4632) + 676.84 = 452.42 + 676.84 = 1129.26

This bond is priced at a premium (P > C = 1{,}000) since, with C = F, the coupon rate (7%) exceeds the yield (5%). Being non-callable, it is sure to pay all eight coupons, so there is no call date to test.