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3 . A corporate bond has a $ 1 0 0 0 face value, 3 years to maturity, and a 5 % annual coupon. This
A corporate bond has a $ face value, years to maturity, and a annual coupon. This bond is retractable puttable only at two times: at the end of year for $ and at the end of year for $ These bonds trade at a yield spread to the stated term structure, and issue costs are minimal and can be ignored. Applying the PEH, when, if ever, would you expect the bondholders to put the bond back to the corporation?
Hint: You will need to determine the expected value of the bond based on the coupon payments and the appropriate forward rates at each of the retraction dates.
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