Bond b requires the investor to forgo 4 a year ie 40 if the

Reference no: EM13595609

Two bonds have the following terms:

Bond A Bond B
Principal $1,000 Principal $1,000
Coupon 8% Coupon 7.6%
Maturity 10 years Maturity 10 years

Bond B has an additional feature: It may be redeemed at par after 5 years (i.e. it has a put feature). Both bonds were initially sold for their face amounts (i.e. $1,000).

a) If interest rates fall to 7%, what will be the price of each bond?
b) If interest rates rise to 9%, what will be the decline in the price of each bond from the initial price?
c) Given your answers to questions (a) and (b), what is the trade-off implied by the put option in bond B?
d) Bond B requires the investor to forgo $4 a year (i.e. $40 if the bond is in existence for 10 years). If interest rates are 8%, what is the present value of this forgone interest? If the bond had lacked the put feature but had a coupon of 7.6% and a term to maturity of 10 years, it would sell for $973.16 when interest rates were 8%. What, then, is the implied cost of the put option?

Reference no: EM13595609

Questions Cloud

1000 ml solution that was made by adding 1026 grams of : 100.0 ml solution that was made by adding 10.26 grams of sucrose c12h22o11 to 95.0 ml of pure water density of pure

An investor in the 35 tax bracket may purchase a corporate : an investor in the 35 tax bracket may purchase a corporate bond that is rated double a and is traded on the nyse the

Rice hepburn and dimacro formed a partnership with rice : rice hepburn and dimacro formed a partnership with rice contributing 60000 hepburn contributing 50000 and dimacro

If the rate constant for this reaction was determined to be : if the rate constant for this reaction was determined to be 5.0 x 10-3 m-1s-1 at 220c and 7.5 x 10-3 m-1s-1 at 350c

Bond b requires the investor to forgo 4 a year ie 40 if the : two bonds have the following terms bond a bond b principal 1000 principal 1000 coupon 8 coupon 7.6 maturity 10 years

1000 ml solution that was made by adding 1026 grams of : 100.0 ml solution that was made by adding 10.26 grams of sucrose c12h22o11 to 95.0 ml of pure water density of pure

Calculate the entropy of a sample of a solid in which the : calculate the entropy of a sample of a solid in which the molecules may be found in any one of four orientations with

If the preferred stock is perpetual and comparable : given the following information concerning a 2.00 convertible preferred stock one share of preferred is convertible

A student purified a 500-mg sample of phthalic acid by : a student purified a 500-mg sample of phthalic acid by recrystallization from water. the published solubility of

User Account

All Pages