Bond A is a $4000 10% 10 year bond paying annual coupons with redemption value $
ID: 2739501 • Letter: B
Question
Bond A is a $4000 10% 10 year bond paying annual coupons with redemption value $2000, which can be purchased at a premium for $3000. • Bond B is a $4000 10% 10 year bond paying annual coupons with redemption value $3000, which can be purchased at a discount for $2000. Suppose further that each bond has a lockout period of 5 years, after which a put option can be placed at the end of years {6, 7, 8, 9} for put premium of $1500.
GIVE DETAILED EXPLANATIONS ON:
1.Why choose one bond over the other.
2.What Situation should they use the put options at year 6, 7, 8, 9
3,Brief Description of what bonds are, what are coupons, what is redemption value, what is premium, what is a put option, what is a discount rate and what is face value. Explain reasoning in detail.
Explanation / Answer
Step-1:
According to my view, I will choose the Bond A, over the other one, because there is more advantage in bond by choosing the premium bond. The premium bonds will keep more in the investor pocket, and there less fluctuations in the interest rates.
Step-2:
The put option investors will chose to sell put option, if the underplaying security was going to rise. The put option pays the premium for the right to sell shares at agreed upon prices in event prices that lower heads lower. But the premium would kept by the seller prices closed to agrees prices. In between 6 to 9 years the prices changes may happen, because of that reason they used the put option.
Step-3:
A bond is promise to pay certain money, on certain date. All documents contacts and loan agreements are bonds.
A coupon is document, that can redeemed for the financial discounts when purchase the bond.
Redemption value is price, which the issuing the company may choose to repurchase the security before its maturity dates.
Premium is an amount paid periodically to the insurer by the insured cover the risks.