10. Consider two three-year bonds with 6% annual coupons and a face value of 100. Assume that these two bonds are identical expect that one bond is callable with a call price of $101, and another bond is non-callable. Assume that the current market interest rate is 6%. Also assume that the market interest rate at t=1 is 4.5% and that the market rates stay at 4.5% until t=3. Which of the following statements are correct (assume annual compounding)? i. 106 The price of the non-callable bond at t=1 is: + 1.045 1.0452 = 102.81 ii. The value at t-3 of the callable bond is: 107 1.045² = 116.85 iii. The value at t=3 of the non-callable bond is: 6 1.06² +6*1.06 + 106 = 119.10 The bond will not be called at t=1. The value at t=3 of the callable bond is: 6 × 1.06² +4.545 1.06 + 105.545 iv. V. =
10. Consider two three-year bonds with 6% annual coupons and a face value of 100. Assume that these two bonds are identical expect that one bond is callable with a call price of $101, and another bond is non-callable. Assume that the current market interest rate is 6%. Also assume that the market interest rate at t=1 is 4.5% and that the market rates stay at 4.5% until t=3. Which of the following statements are correct (assume annual compounding)? i. 106 The price of the non-callable bond at t=1 is: + 1.045 1.0452 = 102.81 ii. The value at t-3 of the callable bond is: 107 1.045² = 116.85 iii. The value at t=3 of the non-callable bond is: 6 1.06² +6*1.06 + 106 = 119.10 The bond will not be called at t=1. The value at t=3 of the callable bond is: 6 × 1.06² +4.545 1.06 + 105.545 iv. V. =
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:10. Consider two three-year bonds with 6% annual coupons and a face value of 100. Assume
that these two bonds are identical expect that one bond is callable with a call price of $101,
and another bond is non-callable. Assume that the current market interest rate is 6%. Also
assume that the market interest rate at t=1 is 4.5% and that the market rates stay at 4.5% until
t=3. Which of the following statements are correct (assume annual compounding)?
i.
The price of the non-callable bond at t=1 is: +
106
1.045 1.0452
102.81
The value at t=3 of the callable bond is: 107 × 1.045² = 116.85
The value at t3 of the non-callable bond is: 6 × 1.06² +6× 1.06 + 106 =
119.10
The bond will not be called at t=1.
*
The value at t=3 of the callable bond is: 6 × 1.06² +4.545 × 1.06 + 105.545 =
117.10.
ii.
111.
iv.
V.
A. (iii) & (iv)
B. (i) only
C. (i) & (ii)
D. (i) & (ii) & (iv)
E. None of the above
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