1. On 1st January 2020, an investment bank (IB) purchases a newly issued 3-year fixed rate A rated corporate bond with a semi-annual coupon rate of 4.1% pa at par. The IB also intends to use three options on the security to create a synthetic step-up bond with the following return graph, assuming none of these options are exercised. Return 4.80% 4.75% 4.70% 4.65% 4.60% 4.55% 4.50% 4.45% 4.40% 4.35% 4.30% 4.25% 4.20% 4.15% 4.10% 4.05% 4.00% 1-Jan-20 1-Mar-20 1-May-20 1-Jul-20- 1-Sep-20 1-Nov-20 1-Jan-21 1-Mar-21 1-May-21 1-Jul-21 1-Sep-21 1-Nov-21 1-Jan-22 1-Mar-22 1-May-22 1-Jul-22 1-Sep-22 1-Nov-22 1-Jan-23 Explain how the IB uses options to achieve this synthetic step-up bond return structure. Please specify IB's position in each option, type of the options, each option's issue date, each option's expiring date and each option's premium. (10 marks) 1. On 1st January 2020, an investment bank (IB) purchases a newly issued 3-year fixed rate A rated corporate bond with a semi-annual coupon rate of 4.1% pa at par. The IB also intends to use three options on the security to create a synthetic step-up bond with the following return graph, assuming none of these options are exercised. Return 4.80% 4.75% 4.70% 4.65% 4.60% 4.55% 4.50% 4.45% 4.40% 4.35% 4.30% 4.25% 4.20% 4.15% 4.10% 4.05% 4.00% 1-Jan-20 1-Mar-20 1-May-20 1-Jul-20- 1-Sep-20 1-Nov-20 1-Jan-21 1-Mar-21 1-May-21 1-Jul-21 1-Sep-21 1-Nov-21 1-Jan-22 1-Mar-22 1-May-22 1-Jul-22 1-Sep-22 1-Nov-22 1-Jan-23 Explain how the IB uses options to achieve this synthetic step-up bond return structure. Please specify IB's position in each option, type of the options, each option's issue date, each option's expiring date and each option's premium. (10 marks)