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-   -   Two bonds have the following terms: Bond A Bond B Principal $1,000 Principal $1,000 (https://www.askmehelpdesk.com/showthread.php?t=791289)

  • May 4, 2014, 04:04 PM
    mercadowo1
    Two bonds have the following terms: Bond A Bond B Principal $1,000 Principal $1,000
    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?
  • May 4, 2014, 07:51 PM
    ma0641
    No homework answers ln this site. Post your work and we will help.

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