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GIVE ME A CALL Bond Loving Company LLC ( BLC ) is a telecom company located in the US . BLC has one
GIVE ME A CALL Bond Loving Company LLC BLC is a telecom company located in the US BLC has one of the first companies in the US to issue debt in the public markets in the form of corporate bonds. Many others have followed this path after BLC and therefore the bond market in the US has become one of the most profitable and liquid markets in the world. BLC has one of the most sophisticated trading desks in the world, with the ability to trade its own bonds and squeeze results You are part of a new team inside BLC a structuring team that is in charge of designing the structure of new bonds. You have come across a new idea, "callable bonds". This new type of bonds will allow BLC to redeem the bond at any time before its maturity by paying the bond's principal ie USD Additionally, you have included in the bond the following characteristics: Coupon annual payments Term years Interest rates for similar bonds in the market are right now First, you want to show your boss how good an analyst you are and all you have learned in your Eng Economy classes, so without taking into account the call option: What is the price of the bond without taking into account the call option? What will be the price of the bond now if interest rates increase to To And what if they decrease to Make a graph showing how the price changes depending on different interest rates Assuming interest rates do not change, what will be the price in one year? In two? In three? Make a graph to show how the price of the bond changes once it approaches maturity Now, that you dominate the "normal" bonds, you want to really impress your boss with this new innovative idea you have. So now taking into account the call option: What is the price of the bond? What will be the price of the bond now if interest rates increase to To And what if they decrease to Make a graph showing how the price changes depending on different interest rates Assuming interest rates do not change, what will be the price in one year? In two? In three? Make a graph to show how the price of the bond changes once it approaches maturity Hint: Your intuition is that the price of this bond will be capped at as nobody will acquire a bond for more than that you can automatically redeem at any time at
GIVE ME A CALL
Bond Loving Company LLC BLC is a telecom company located in the US BLC has one of
the first companies in the US to issue debt in the public markets in the form of corporate bonds.
Many others have followed this path after BLC and therefore the bond market in the US has
become one of the most profitable and liquid markets in the world.
BLC has one of the most sophisticated trading desks in the world, with the ability to trade its
own bonds and squeeze results
You are part of a new team inside BLC a structuring team that is in charge of designing the
structure of new bonds. You have come across a new idea, "callable bonds". This new type of
bonds will allow BLC to redeem the bond at any time before its maturity by paying the bond's
principal ie USD
Additionally, you have included in the bond the following characteristics:
Coupon annual payments
Term years
Interest rates for similar bonds in the market are right now
First, you want to show your boss how good an analyst you are and all you have learned in your
Eng Economy classes, so without taking into account the call option:
What is the price of the bond without taking into account the call option?
What will be the price of the bond now if interest rates increase to To And what
if they decrease to Make a graph showing how the price changes
depending on different interest rates
Assuming interest rates do not change, what will be the price in one year? In two? In
three? Make a graph to show how the price of the bond changes once it approaches
maturity
Now, that you dominate the "normal" bonds, you want to really impress your boss with this new
innovative idea you have. So now taking into account the call option:
What is the price of the bond?
What will be the price of the bond now if interest rates increase to To And what
if they decrease to Make a graph showing how the price changes
depending on different interest rates
Assuming interest rates do not change, what will be the price in one year? In two? In
three? Make a graph to show how the price of the bond changes once it approaches
maturity
Hint: Your intuition is that the price of this bond will be capped at as nobody will acquire
a bond for more than that you can automatically redeem at any time at
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