Question #55

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

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

Page: 24

Status: Unattempted

Part of Context Group: Q55-57 First in Group
Shared Context
- Which of the following represent the correct values that should be within the tree in the places marked by A and B? A) A = 99.041    B = 100.000 B) A = 99.041    B = 100.315 C) A = 100.000    B = 100.000 Explanation A is 99.041 since the call price is higher at 100 and the issuer will choose the cheapest route. The missing value F = 106.5 ÷ 1.06166 = 100.315 and hence B is 100 since it is cheaper for the issuer to call. (Module 27.6, LOS 27.l)
Question
Which of the following represent the correct value that should be within the tree in the place marked by D?
Answer Choices:
A. 102.000
B. 101.723
C. 101.000. Explanation Lower of F (101.723) and the call price in two years' time of 101. (Module 27.2, LOS 27.f)
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