$10$:$07$

FNCE$\_$ECON$300$v$3\_$Assign$2.$do$...$

$7\mathrm{.}2$

$(14$ marks$)$

a$.$ Does a callable bond benefit the issuer of a bond or the purchaser? Would the price of a callable bond be higher or lower than a non$-$callable bond, all else being equal?

$(3$ marks$)$

b$.$ Does a convertible bond benefit the issuer of a bond or the purchaser? Would the price of a convertible bond be higher or lower than a non$-$convertible bond, all else being equal?

$(3$ marks$)$

c$.$ Given your answers to parts a and b$,$ check to see whether the prices in the following table are consistent.

You will analyze the following three bonds, which are identical except for the special features listed.

$(8$

marks total$)$

$\backslash$table$[[$Bond$,\backslash$table$[[$Face$],[$value$]],$Maturity,$\backslash$table$[[$Coupon$],[$rate $($paid$],[$annually$)]],\backslash$table$[[$Yield to$],[$maturity$*]],\backslash$table$[[$Special$],[$features$]],$Price$],[$a$,1000,20$ years,$5\mathrm{.}5\%,5\%,$None,$1062\mathrm{.}31],[$b$,1000,20$ years,$5\mathrm{.}5\%,5\mathrm{.}5\%,$Callable,$1000\mathrm{.}00],[$c$,1000,20$ years,$5\mathrm{.}5\%,3\mathrm{.}5\%,\backslash$table$[[$Callable and$],[$Convertible$],[$into stock$]],1284\mathrm{.}25]]$

Yield to maturity represents the market's required rate of return. It is calculated using only the price, the stated coupon payments, and face value, without regard for the special features.

i$.$ What is the implied value of the callability provision? $(2$ marks$)$

ii$.$ Is this value consistent with your answer to part a$?$ Briefly explain.

$(2$ marks$)$

iii. What is the implied value of the conversion privilege?

$(2$ marks$)$

iv$.$ Is this value consistent with your answer to part b$?$ Briefly explain.

$(2$ marks$)$

$7\mathrm{.}3$ Note: Each of the following question parts is independent. You are required to complete part $a.$ Part b is not required, but you can earn up to $20$ bonus marks for completing it correctly. However, your total assignment mark cannot exceed $170($the maximum marks for the entire assignment$).$

a$.$ Your investment in E$.$ Wang Fincorp Ltd$.$ just paid a dividend of $$6\mathrm{.}50$ per share. You have been pleased with the $15\%$ return you have earned on this stock, and you expect it to continue at this rate indefinitely.