Question #43

Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options

PDF File: Reading 27 Valuation and Analysis of Bonds With Embedded Options.pdf

Page: 11

Status: Unattempted

Part of Context Group: Q43-44 First in Group
Shared Context
- Which of the following statements is/are correct? Statement I: The straight bond should trade for less than $102. Statement II: If interest rate volatility were to increase then the price differential between the two Redna bonds would widen. A) Both statements are correct. B) Statement I is correct but Statement II is incorrect. C) Statement I is incorrect but Statement II is correct.
Question
Suppose Redna were to issue a bond that was identical in all respects to the existing callable bond except that instead it was putable. How would a binomial tree valuation be adapted?
Answer Choices:
A. The put option becomes an effective floor price at each applicable node, instead of the call’s effective ceiling price
B. The put option becomes an effective floor price at each applicable node, as well as the call’s effective ceiling price
C. The put option becomes an effective ceiling price at each applicable node
No explanation available for this question.
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