Bond A Principal $1,000 Coupon 8% Maturity 10 years Bond B Principal $1,000 Coup
ID: 2698016 • Letter: B
Question
Bond A Principal $1,000 Coupon 8% Maturity 10 years Bond B Principal $1,000 Coupon 7.6% 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? Please answer all questions to get creditExplanation / Answer
Follow the link http://www.chegg.com/homework-help/investments-an-introduction-10th-edition-chapter-16-problem-4p-solution-9780538452090 your answer is there...Good luck...