The theoretical value of a noncallable bond is $103; the theoretical value of a callable bond is $101 . Determine the theoretical value of the call option

What will be an ideal response?


Effectively, the owner of a callable bond is entering into two separate transactions. First, the owner buys a noncallable bond from the issuer. Second, the owner sells the issuer a call option at a designated option price. The payment received lowers the value of the callable bond. Thus, in terms of price, a callable bond is generally speaking equal to the price of the two components parts that we can express as: callable bond price = noncallable bond price – call option price. Rearranging, we have: call option price = noncallable bond price – callable bond price. Inserting in our values, we have:
call option price = $103 – $102 = $2 .

In terms of a bond's par value of $1,000, the value of the call option is $20.00 .

Business

You might also like to view...

Purchase orders are sent to:

a. customers b. vendors c. carriers d. managers

Business

When all members of a team are given the opportunity to voice their views and are listened to fairly, which of the following do they experience?

A) respect B) a spirit of competition C) accountability D) enthusiasm

Business

The specialized language of a particular profession or industry is known as clichés

Indicate whether the statement is true or false.

Business

The difference between the economic resources received from customers and the economic resources paid to suppliers, employees and other providers of goods and services is called ____________________

Fill in the blank(s) with correct word

Business