Question #41

of 98 For a convertible bond without any other options, the call feature implied by the convertibility feature will do all of the following EXCEPT: A) increase the value of the bond over that of a comparable option-free bond. B) cause negative convexity. C) place a lower limit on the possible values of the bond. George Nagy is a fixed income manager with Luna Securities. Nagy is analyzing several securities issued by Redna, Inc. First, he is looking at a three-year, annual-pay floating rate note with an embedded cap of 6.5% paying coupons in arrears. Nagy's assistant has provided him with the binomial interest rate tree below (computed with assumed volatility of 25%) to aid in her analysis. T0 T1 T2 9.892% 7.704% 6% 6% 4.673% 3.639% A three-year, Redna, Inc., callable bond is currently trading at a price of $102. An otherwise identical straight bond is also trading. Nagy obtains the report of the firm's chief economist indicating that rates are trending lower.