Hybrid bonds-gold-indexed securities

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Reference no: EM133055848

Hybrid Bonds: Gold-Indexed Securities Attached are extracts from the first page of the prospectus for Gold-Denominated Depositary shares sold by Freeport McMoran Copper and Gold (FCX). The depositary shares have features that are very much like a bond in that they have fixed payment and a maturity. The depositary shares are backed by FCX preferred stock that pays a gold-dividend and held in trust with Mellon Bank. The gold indexed depositary shares paid a gold-dividend of 0.000875 ounces of gold every quarter for a fixed period of 10-years. In addition, the depositary shares paid a face value of 0.1 ounces of gold at the end of the 10-year period. Each depositary share has an initial value of 0.1 ounces of gold.

(A) Explain how the gold denominated depositary shares is really a combination of a bond that pays a fixed dollar coupon plus a sequence of gold-forward contracts.

(B) Explain how you can use the gold futures pricing equations to determine the value of the security

Reference no: EM133055848

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