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Question (Relevant to the Series 6, Series 7, Series 62, Series 65 and Series 79): A few years back ABC Corporation issued callable bonds yielding 6%. The call price is 104, and the call protection period has ended. The bonds are trading at 105 today. Which of the following are true:
I. The current yield on these bonds is 6.3%
II. The current yield on these bonds is 5.7%
III. There is a good chance the bonds will be called
IV. There is a good chance the bonds will not be called
A. I and III
B. I and IV
C. II and III
D. II and IV
Correct Answer: C. II and III
Rationale: The formula for calculating current yield is the annual interest on the bond ($60) divided by the current price of the bond ($1050) which is equal to 5.7%. Because ABC can finance the debt at a lower interest rate than they are currently paying there is a good chance that they will call the bonds.
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