7. Suppose that you are given the following information about two callable bonds that can be called immediately:
|
|
Estimated Percentage Change in Price if Interest Rates Change by: |
|
|
|
–100 basis points |
+100 basis points |
|
Bond ABC |
+4% |
–9% |
|
Bond XYZ |
+32% |
–19% |
You are told that both of these bonds have the same maturity and that the coupon rate of one bond is 8% and of the other is 14%. Suppose that the yield curve for both issuers is flat at 9%. Based on this information, which bond is the lower coupon bond and which is the higher coupon bond? Explain why.
10. Is it possible for an investor to pay more than the call price for a bond that is likely to be called? (No more than 100 words)
13. The current on-the-run yields for the Ramsey Corporation are as follows:
|
Maturity (years) |
Yield to Maturity (%) |
Market Value |
|
1 |
8 |
100 |
|
2 |
8.3 |
100 |
|
3 |
8.5 |
100 |
Assume that each bond is an annual-pay bond. Each bond is trading at par, so its coupon rate is equal to its yield to maturity.
Answer the below questions.
(a) Using the bootstrapping methodology, complete the following table:
|
Year |
Spot Rate (%) |
One-Year Forward Rate (%) |
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
(b) Using the spot rates, what would be the value of a 3-year 9% coupon option-free bond of this issuer?
(c) Using the binomial model (which assumes that one-year rates undergo a lognormal random walk with volatility s), show that if s is assumed to be 15%, is it correct that the lower one-year forward rate one year from now equal to 6 %.
(d) Demonstrate that if σ is assumed to be 15%, using Excel solver to solve how much is the lower one-year forward rate one year from now. Pls draw a binomial model and put the value on each of the node.
(e) Demonstrate that if σ is assumed to be 15%, using Excel solver to solve how much is the lower one-year forward rate two years from now. Pls draw a binomial model and put the value on each of the node.
(f) Determine the value of a 3-year, 9% coupon bond that is callable at par (100) assuming that the issue will be called if the price exceeds par.
15. a. What is meant by the option-adjusted spread?
b. What is the spread relative to?
17. What is the effect of greater expected interest-rate volatility on the option-adjusted spread of a security?
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