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. Bonus Problem 3 (Optional, 30 marks) We consider a n-year callable bond issued today. You are given that The bond has face value F

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. Bonus Problem 3 (Optional, 30 marks) We consider a n-year callable bond issued today. You are given that The bond has face value F and annual coupon rate c payable annually. The bond can be redeemed at any coupon payment date starting from mth year (i.e. the first redemption date will be at mth coupon payment date) including maturity date. Here, m 0. Suppose that Cm 2 Cm+1 2 ... Cn > 1, show that the current price of the callable bond can be computed as P = rFali + (1 + i) (Hint: You may mimic the proof of theorem 1 and theorem 2) rF . Bonus Problem 3 (Optional, 30 marks) We consider a n-year callable bond issued today. You are given that The bond has face value F and annual coupon rate c payable annually. The bond can be redeemed at any coupon payment date starting from mth year (i.e. the first redemption date will be at mth coupon payment date) including maturity date. Here, m 0. Suppose that Cm 2 Cm+1 2 ... Cn > 1, show that the current price of the callable bond can be computed as P = rFali + (1 + i) (Hint: You may mimic the proof of theorem 1 and theorem 2) rF<.><.>

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