Interesting Bond Investment decsion

a bond was purchased in 2010 with the following characteristics:

Par value= 1000
Purchase price= 950
coupon= 8.5% (4.25% semi-annually)
Callable in 2016 (assume an even 6 years since purchase date) at fair value.
The bond currently trades at 1070.

My task was to determine if it is more beneficial to trade the bonds now or hold until the call date which is exactly 21 months from now. Given this round of debt was issued at the height of the financial crisis in Europe (but dollar denominated bonds) an 8.5 percent coupon was necessary, but now in 2016 given the dramatic decrease in interest rates and the fact that this company is now AAA rated, it is a given that this company will want to refinance and will call the bond.

My approach was to calculate an implied yield to call from 2010 which gave me a rough estimate of annual return on investment given continuous compounding. I used this implied yield to calculate ROI for the remaining 1.75 years until call for some arbitrary investment value. I then calculated the ROI if I traded bonds bought at 950 and sold for 1070. I compared these two values to ascertain whether I should hold until call or trade now.

I was wondering if this was the right approach and if anybody else had a better way to do this? Just wanted to get an opinion and check my analysis because I had never done anything like this before. Thanks

2 Comments
 

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