Question 4 A stock market index with a current price of $800.00 pays a continuous dividend at the annual rate of 2.0%. The annual volatility of the index is 20.0%. An index-linked 4-year bond is to be designed with a maturity of 4 years. - a. What is the current price of the zero-coupon equity-linked bond that pays one unit of the stock market index at maturity? [Mark: 20%] b. The bond of part (1) is restructured to include a constant annual coupon. What is the required annual coupon for this restructured bond for this bond to be priced at par at issue? [Mark: 30%) C. The bond of part (ii) is restructured to include an embedded option at maturity. This gives the bond holder the right to receive a specified percentage of any price appreciation achieved by the index on the maturity date. The specified percentage is referred to as the participation rate. The bond dealer sets the participation rate at 20.0%. Using the Black-Scholes option pricing formula, determine the annual coupon for this restructured bond for the bond to be priced at par [Mark: 40%] d. Explain why the annual coupon rate for bond (ii) is greater than the annual coupon rate for bond (ii). Mark: 10% Question 4 A stock market index with a current price of $800.00 pays a continuous dividend at the annual rate of 2.0%. The annual volatility of the index is 20.0%. An index-linked 4-year bond is to be designed with a maturity of 4 years. - a. What is the current price of the zero-coupon equity-linked bond that pays one unit of the stock market index at maturity? [Mark: 20%] b. The bond of part (1) is restructured to include a constant annual coupon. What is the required annual coupon for this restructured bond for this bond to be priced at par at issue? [Mark: 30%) C. The bond of part (ii) is restructured to include an embedded option at maturity. This gives the bond holder the right to receive a specified percentage of any price appreciation achieved by the index on the maturity date. The specified percentage is referred to as the participation rate. The bond dealer sets the participation rate at 20.0%. Using the Black-Scholes option pricing formula, determine the annual coupon for this restructured bond for the bond to be priced at par [Mark: 40%] d. Explain why the annual coupon rate for bond (ii) is greater than the annual coupon rate for bond (ii). Mark: 10%