Create synthetic callable debt from non-callable debt

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Reference no: EM13764986

You have graduated, and are on the staff of the Assistant Treasurer of company CKS. (You are an assistant to the Assistant Treasurer.) Your boss, the Assistant Treasurer, recently attended a conference at which he heard that swaptions could be used to create synthetic callable debt from non-callable debt. He did not understand this, and wants you to explain it to him. Specifically, suppose that your company, CKS, issued a two-year non-callable fixed-rate note paying 6% per year, with interest to be paid semi-annually. (That is, the note pays 3% every six months). Your boss wants to know how to use swaptions to convert this to a synthetic callable bond that is callable after one year (at time 1). Please prepare a table of cash flows that shows how to use swaptions and perhaps other instruments to convert the non-callable bond into a synthetic callable bond. Please also briefly explain the various transactions.

Reference no: EM13764986

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