Question
Consider two three-year bonds that have annual coupons of 7% per annum and a face value of 100. The first bond is not-callable while the
Consider two three-year bonds that have annual coupons of 7% per annum and a face value of 100. The first bond is not-callable while the second bond may be called one year from now with a call price of $101.50. Also, assume that the current market interest rate is 7%. Which of the following statements are correct (assume annual compounding)? i. The market value of the non-callable bond today is: 7*1.07^(-1) + 7*1.07^(-2) + 107*1.07^(-3) = 100 ii. If interest rates today fall from 7% to 6.2% and are expected to stay like this until t=3, the market value of the non-callable bond today is: 7*1.062^(-1) + 7*1.062^(-2) + 107*1.062^(-3) = 102.13 iii. If interest rates today fall from 7% to 6.2% and are expected to stay like this until t=3, the market value of the callable bond today is: 7*1.062^(-1) + 7*1.062^(-2) + 107*1.062^(-3) = 102.13 iv. If interest rates today fall from 7% to 6.1% and are expected to stay like this until t=3, the market value of the non-callable bond today is: 7*1.061^(-1) + 7*1.061^(-2) + 107*1.061^(-3) = 102.40 v. If interest rates today fall from 7% to 6.1% and are expected to stay like this until t=3, the market value of the callable bond today is: 108.5*1.061^(-1)=102.26 Group of answer choices
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started