1. Embedded option bonds. (Throughout this question, assume no other embedded options and no credit risk). (10 points) a. Describe the purchase of a callable bond as two simultaneous transactions. Then describe the purchase of a puttable bond as two simultaneous transactions. b. Assume a bond has both embedded options and that we are in a region of the discount rate distribution in which both options are out of the money. As the discount rate increases, which option moves further out-of-the money? And which moves closer being in-the-money? c. Assume a bond has only an embedded call and that a firm will only exercise its option for reasons associated with reducing its interest expense. Let y* be the value of the discount rate at which the firm exercises its option, and assume the discount rate y is currently above y* (y>y*). As interest rates fall, in which regions would we expect price compressionegative convexity to occur: y>y*, y=y*, and/or yy*). As interest rates fall, in which regions would we expect price compressionegative convexity to occur: y>y*, y=y*, and/or y