Question
General Motors Company, a major US manufacturer of cars and trucks, issues a five-year bond that pays no coupons. At the bonds maturity the company
General Motors Company, a major US manufacturer of cars and trucks, issues a five-year bond that pays no coupons. At the bonds maturity the company promises to pay $100M plus an additional amount based on the price of their stock at that time. The additional amount is equal to the product of 1 million and the excess (if any) of the stock price at maturity over the current price $30. The maximum additional amount paid is $10M. Show that the bond is a combination of a regular zero coupon bond, a long position in call options with a strike price of $30, and a short position in call options with a strike price of $40.
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