Five years ago you purchased at face value a newly issued Winterthur Insurance Corporation (WIC) fixed-rate bond with an 6% coupon and a six-year maturity. The bond was structured with a put feature which allows you to exercise the option at a strike price of 98 one year before maturity, i.e., you have the option to sell the bond back to WIC at the strike price of 98 percent of face value. Currently the one-year yield on short-term bonds with similar credit risks are 9% and if you exercised the option you could take the proceeds and invest in the short-term bonds. To simplify calculations, assume the bond pays an annual coupon. Explain whether you should exercise the option, i.e., sell the bond back to the company at 98 and invest the money for a year at 9% as opposed to keeping the bond until maturity? Given your decision, explain how you would calculate the effective annual rate of return you would have you earned on your six-year investment?
Five years ago you purchased at face value a newly issued Winterthur Insurance Corporation (WIC) fixed-rate bond with an 6% coupon and a six-year maturity. The bond was structured with a put feature which allows you to exercise the option at a strike price of 98 one year before maturity, i.e., you have the option to sell the bond back to WIC at the strike price of 98 percent of face value. Currently the one-year yield on short-term bonds with similar credit risks are 9% and if you exercised the option you could take the proceeds and invest in the short-term bonds. To simplify calculations, assume the bond pays an annual coupon. Explain whether you should exercise the option, i.e., sell the bond back to the company at 98 and invest the money for a year at 9% as opposed to keeping the bond until maturity? Given your decision, explain how you would calculate the effective annual
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