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1. A bond with an embedded put option gives the holder of the bond the right to redeem the bond at a pre-determined price (usually
1. A bond with an embedded put option gives the holder of the bond the right to redeem the bond at a pre-determined price (usually par) at a certain point (or period) of time. Assume that an investor owns such a bond with a coupon rate of 6%, maturity of 2 years and a put option at the end of the first year. Assuming the term structure of interest rates, and the same interest rate tree given in the lecture notes in slide deck 8: a. Compute the price of a 2-year 6% bullet. b. Compute the price of a 2-year 6% puttable bond with a strike price of par. c. What is the value of the embedded put option? 1. A bond with an embedded put option gives the holder of the bond the right to redeem the bond at a pre-determined price (usually par) at a certain point (or period) of time. Assume that an investor owns such a bond with a coupon rate of 6%, maturity of 2 years and a put option at the end of the first year. Assuming the term structure of interest rates, and the same interest rate tree given in the lecture notes in slide deck 8: a. Compute the price of a 2-year 6% bullet. b. Compute the price of a 2-year 6% puttable bond with a strike price of par. c. What is the value of the embedded put option
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