Why should the price of the option component be "equal to the difference between the dual currency bond price and its bond component"?
What will be an ideal response?
In a perfect capital market environment (with no transaction costs and other frictions), the value of an asset with an embedded option should be equal to the value of the asset without the option plus the value of the option. This is because investors should be indifferent as to how the two investments are packaged. They should pay equally for either (i) the bond with the embedded option packaged together or (ii) the bond and option packaged separately.
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An annual rate of 4% is applied as a semiannual rate of 1%.
Answer the following statement true (T) or false (F)
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