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Two bonds have the following terms

BondA BondB
Principal $1000 $1000
Coupon 8% 7.6%
Maturity 10 years 10 years

Bond B has an additional feature: It may be redeemed at par after 5 years. both bonds were initially sold for their face amounts.

a) If interest rates fall to 7%, what will be the price of each bond
b) If interest rate rise to 9%, what will be the decline in the price pf each bond from its initial price
c) Given your answer to problem a and b, what is the trade off implied by the put option in bond B
d) Bond B requires the investor to forge $4 a year.If the 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 percent and a term to maturity of ten years, it would sell for $973.16 when interest rates were 8 percent. What, then, is the implied cost of the put option

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M939397

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