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At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2021: The bond
At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2021: The bond in the middle is callable in February 2022. What is the implied value of the call feature based on the ask prices? In other words, we learnt in class that the price of a callable bond should be lower than the otherwise identical bonds without the callable feature. What is this discount (based on ask prices)? Assume a par value of $1,000. (Hint: Is there a way to combine the two noncallable issues to create an issue that has the same coupon as the callable bond?)
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