Question
A Bank has issued 5-year zero coupon bonds that has an unusual feature: which face value of the bonds at maturity depends on the price
A Bank has issued 5-year zero coupon bonds that has an unusual feature: which face value of the bonds at maturity depends on the price of the company's stock price (ST) at maturity.
The specific formula is shown below:
| Share price at maturity of bonds in five years (ST) | Payment to Bond holders at Maturity (T = 5) |
| ST < 40.0 | ST |
| 40.0 ST 45.0 | 40.0 |
| 45.0 < ST | ST 5 |
Assume that the stock price S0 (at the time the bonds are issued) is $40.0. The Call and Put option prices for their respective strikes are given below.
| Strike Price | Call Price | Put Price |
| 40.0 | 20 | 10 |
| 45.0 | 18 | 14 |
Please Find the Price of each bond issued by A Bank.
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Principles Of Sustainable Finance
Authors: Dirk Schoenmaker, Willem Schramade
1st Edition
0198826605, 978-0198826606
