A. i and iv

B. ii and iii

C. ii and iv

D. ii, iii and iv

Please help me answer this question. Thank you very much!! the answers are completed. there is no answer for iv alone.

QUESTION 1 For bond issuers, issuing bonds means that issuers are borrowing B (market value of the bond) today from investors by promising C(coupon rate) for M (maturity) periods. As much as bond investors are affected by changes in interest rate (interest rate risk and reinvestment risk), bond issuers are also affected by interest rate changes. For instance, if interest rates go down substantially after the issuance, it would mean that they could have borrowed at lower interest rates (now that the market interest rate is relatively lower) yet they are paying the promised C instead. This adverse situation will be also reflected in the bond price (If interest rates go down, the bond price will go up after the issuance, which will make the investors better off. This also means the issuer could have made (borrowed) more with the same C and M if they waited a bit longer). In order to protect themselves from this adverse situation, issuers sometimes issue bonds with embedded call option. For this, the issuer will set the call price at B* and when they want to buy the bonds that are out there, they can force the bond holders to return their bonds and instead the issuer will pay the predetermined B* (when the issuer indeed "call" the bonds and buy them back, we say that the "call" option is "exercised".) Since this call option is the right the issuers have, they will call the bonds when it is favorable for them. Thus, they are "more likely" (but does not have to) to call the bonds when the market interest rate decreases. This type of bonds are called "callable bonds" PAP(y) P'(y) YTM" YTM* In the above figures, Ply) [Red line on the left] indicates the typical price function of a bond with respect to its yield. When the market interest rates decrease (thus, the bond's yield will go below its initial YTM*), the chances that the issuers will call back the bonds will increase (much more so if the interest rates go down even further). As a result, price function of a callable function looks like P'ly) [red line on the right). Which of the following statements are CORRECT? (Ignore default risk) i. Callable bonds should have higher interest rate risk than non-callable bonds with same coupon and maturity. ii. Duration of non-callable bond should be higher than callable bonds. iii. If market interest rate is positively correlated with the return on the market portfolio (-index such as S&P500), single factor beta (market beta) of a callable bond will be lower than the beta of the equivalent (same coupon and maturity) non-callable bond (Ply) is the correct price function for bonds.). QUESTION 1 For bond issuers, issuing bonds means that issuers are borrowing B (market value of the bond) today from investors by promising C(coupon rate) for M (maturity) periods. As much as bond investors are affected by changes in interest rate (interest rate risk and reinvestment risk), bond issuers are also affected by interest rate changes. For instance, if interest rates go down substantially after the issuance, it would mean that they could have borrowed at lower interest rates (now that the market interest rate is relatively lower) yet they are paying the promised C instead. This adverse situation will be also reflected in the bond price (If interest rates go down, the bond price will go up after the issuance, which will make the investors better off. This also means the issuer could have made (borrowed) more with the same C and M if they waited a bit longer). In order to protect themselves from this adverse situation, issuers sometimes issue bonds with embedded call option. For this, the issuer will set the call price at B* and when they want to buy the bonds that are out there, they can force the bond holders to return their bonds and instead the issuer will pay the predetermined B* (when the issuer indeed "call" the bonds and buy them back, we say that the "call" option is "exercised".) Since this call option is the right the issuers have, they will call the bonds when it is favorable for them. Thus, they are "more likely" (but does not have to) to call the bonds when the market interest rate decreases. This type of bonds are called "callable bonds" PAP(y) P'(y) YTM" YTM* In the above figures, Ply) [Red line on the left] indicates the typical price function of a bond with respect to its yield. When the market interest rates decrease (thus, the bond's yield will go below its initial YTM*), the chances that the issuers will call back the bonds will increase (much more so if the interest rates go down even further). As a result, price function of a callable function looks like P'ly) [red line on the right). Which of the following statements are CORRECT? (Ignore default risk) i. Callable bonds should have higher interest rate risk than non-callable bonds with same coupon and maturity. ii. Duration of non-callable bond should be higher than callable bonds. iii. If market interest rate is positively correlated with the return on the market portfolio (-index such as S&P500), single factor beta (market beta) of a callable bond will be lower than the beta of the equivalent (same coupon and maturity) non-callable bond (Ply) is the correct price function for bonds.)