AZ is a fixed income investment firm. On 1 January 20X0, Jessica Key, an analyst at AZ, is reviewing 3 fixed-rate bonds issued by Apple Inc. The 3 bonds have the highest quality credit rating, and their characteristics are shown in Exhibit I below: Exhibit 1: Fixed-Rate Bonds Issued by Apple Inc. The one-year, two-year, and three-year par rates are 2.250%,2.750%, and 3.100%, respectively. Based on an estimated interest rate volatility of 10%, Jessica Key constructs the binomial interest rate as follows: 1. The current 1 -year rate is 2.2500% 2. The lower 1-year rate one year from now is 2.9417% 3. The higher 1-year rate one year from now is 3.5930% 4. The 1-year rate in second year assuming the lower rate in the first year and the lower rate in the second year is 3.1150% 5. The 1-year rate in second year assuming the higher rate in the first year and the higher rate in the second year is 4.6470% 6. The 1-year rate in second year assuming the higher rate in the first year and the lower rate in the second year or equivalently the lower rate in the first year and the higher rate in the second year is 3.8046% Use the above information to answer questions 6 to 12 . The value of Bond 2 is closest to: A. 102.103% of par B. 103.121% of par C. 103.744% of par D. 104.744% of par The value of Bond 3 is closest to: A. 102.103% of par B. 103.121% of par C. 103.744% of par D. 104.744% of par All else being equal, a rise in interest rates will most likely result in the value of the option embedded in Bond 3 : A. decreasing B. remain unchanged C.increasing All else being equal, if Jessica Key assumes an interest rate volatility of 15% instead of 10%, the bond that would most likely increase in value is: A. Bond 1 B. Bond 2 C. Bond 3 D. Bond 1 and Bond 2 All else being equal, if the shape of the yield curve changes from upward slopping to flattening, the value of the option embedded in Bond 2 will most likely: A. decrease B. remain unchanged C.increase AZ is a fixed income investment firm. On 1 January 20X0, Jessica Key, an analyst at AZ, is reviewing 3 fixed-rate bonds issued by Apple Inc. The 3 bonds have the highest quality credit rating, and their characteristics are shown in Exhibit I below: Exhibit 1: Fixed-Rate Bonds Issued by Apple Inc. The one-year, two-year, and three-year par rates are 2.250%,2.750%, and 3.100%, respectively. Based on an estimated interest rate volatility of 10%, Jessica Key constructs the binomial interest rate as follows: 1. The current 1 -year rate is 2.2500% 2. The lower 1-year rate one year from now is 2.9417% 3. The higher 1-year rate one year from now is 3.5930% 4. The 1-year rate in second year assuming the lower rate in the first year and the lower rate in the second year is 3.1150% 5. The 1-year rate in second year assuming the higher rate in the first year and the higher rate in the second year is 4.6470% 6. The 1-year rate in second year assuming the higher rate in the first year and the lower rate in the second year or equivalently the lower rate in the first year and the higher rate in the second year is 3.8046% Use the above information to answer questions 6 to 12 . The value of Bond 2 is closest to: A. 102.103% of par B. 103.121% of par C. 103.744% of par D. 104.744% of par The value of Bond 3 is closest to: A. 102.103% of par B. 103.121% of par C. 103.744% of par D. 104.744% of par All else being equal, a rise in interest rates will most likely result in the value of the option embedded in Bond 3 : A. decreasing B. remain unchanged C.increasing All else being equal, if Jessica Key assumes an interest rate volatility of 15% instead of 10%, the bond that would most likely increase in value is: A. Bond 1 B. Bond 2 C. Bond 3 D. Bond 1 and Bond 2 All else being equal, if the shape of the yield curve changes from upward slopping to flattening, the value of the option embedded in Bond 2 will most likely: A. decrease B. remain unchanged C.increase
