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Assume that the 3-year 4.5% bond is callable in Year 1 at (101) and in Year 2 at par. The call rule is to call whenever the price exceeds the call price. Calculate the value of the bond with the embedded option.
a. What is the value of the embedded call option?
b. Suppose the market price of the 3-year callable bond is 100.125, what is the option adjusted spread?
A stock's returns have the following distribution: Demand for the Company's Products Probability of This Demand Occurring Rate of Return If This Demand Occurs Weak 0.1 -20% Below average 0.1 -15 Average 0.4 12 Above average 0.3 32 Strong 0.1 50 1.0. ..
After Bear Stearns collapsed in the spring 2008, the FDIC insured the liabilities of all money market funds at $1 per share plus accrued interest. In autumn 2007, Bear Stearns began to replace unsecured commercial paper with tri-party repo borrowing ..
A company is using the Profitability Index (PI) when evaluating projects. You have to find the PI for the company's project, assuming the company's cost of capital is 9.5%. The initial outlay for the project is $379,000. The project will produce the ..
Thomas Brothers is expected to pay a $3.3 per share dividend at the end of the year (that is, D1 = $3.3). The dividend is expected to grow at a constant rate of 3% a year. The required rate of return on the stock, rs, is 17%. What is the stock's curr..
Suppose that Unkempt Inc. common stock paid an annual dividend last year of $2.13, has a cost of common equity of 14%, and had a dividend growth rate of 1%, what would the common stock be worth on a per share basis? If there are 100 million shares ou..
The six month and one-year rates are 3% and 4% per annum with semi-annual compounding. Is 3.90% or 3.95% or 3.99% closest to the one-year par yield expressed with semi-annual compounding?
Your retirement strategy is to invest 500 per month in an equity mutual fund and 200 per month in a bond fund. Your retirement date is 40 years from now. The expected return on the stock fund is expected to be 6% and the expected return on the bond f..
If a nurse deposits $1,000 today in a bank account and the interest is compounded annually for 12 percent, what will be the value of this investment: Five years from now
Why do bubbles and bursts occur in financial markets? In discussing this issue, you need to focus on the rationality of investors, the availability of information to different categories of investors, and the use of historical data in financial d..
Lloyd and Harry Limo Service, Co. is currently operating at 92% of fixed asset capacity. Fixed assets on the balance sheet are $593,000. Current sales are $640,000, and are projected to grow to $792,000. How many in new fixed assets are required to s..
Bright Sun, Inc. sold an issue of 30-year $1,000 par value bonds to the public. The bonds had a 12.12 percent coupon rate and paid interest annually. It is now 12 years later. The current market rate of interest on the Bright Sun bonds is 12.03 perce..
How did you derive your forecast? Why did you choose the base case assumptions that you did? Based on your pro forma projections, how much additional financing will The Body Shop need during this period? What are the three or four most important assu..
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