Provide an intuitive explanation for the nature of the volatility risk of callable and puttable bonds, which is that interest rate volatility has a negative relation with the price of a callable bond, but a positive relation with the price of a puttable bond.
In callable bond the issuer has right to call back the bond at the pre-determined price fixed at the time of issue. On the other hand , in case of puttable bond the investor has the right to sale the bond at the pre-determined price fixed at the time of issue.
Interest rate volatility means the risk of change in the interest rate.
Negative relation of Interest rate volatility on price of callable bond
As discussed above the issuer has the right to call back the bond. In case the interest rate falls the issuer can opt for bond refinancing option. Hence higher the interest rate volatility the price of the bond will be at greater discount to compensate the call option and vice versa.
Positive relation of Interest rate volatility on price of puttable bond
As discussed above the investor has the right to sell back the bond. In case the interest rate rises the investor can sale the bond at pre determined price and invest in cheaper bond. Hence higher the volatility of the interest rate is favourable for investor so the price will be at premium and vice versa.
Provide an intuitive explanation for the nature of the volatility risk of callable and puttable bonds,...
Requires a series of clear and formal answer process, THANK U! 3. a) You are a producer of steel and need to purchase raw steel as input for your factory. You expect to spend 100,000 USD in five years' time to purchase the raw steel. However, you also know that steel price is influenced by interest rates movements and that for 19% change in the risk free rate, the price of raw steel will change by 4.5%, what investment strategy...
12. Price risk and reinvestment rate risk Aa Aa Which of the following statements are true? Check all that apply. Bonds with similar coupons will always have the same percentage price change, no matter the maturity. Rising interest rates cause the value of outstanding bonds to decrease A decline in interest rates will lead to a decline in the price of an outstanding bond To minimize interest rate risk, an investor should buy long-term bonds. Which of the following bonds...
Which of these bonds does NOT provide options to the issuer? a/ PIK note b/ Callable bond c/ Coco bond d/ Extendible bond
1. Which of the following bonds has the lowest interest rate risk? A. 3-year 5% corporate bond. B. 30-year 5% corporate bond. C. 30-year zero-coupon corporate bond. 2. If the effective duration of a callable bond is 5 and the negative convexity adjustment is 1%. If yield were to fall by 100 basis point, the duration combined with convexity would: A. Produce a price change of 5% B. Produce a price change of less than 5%. C. Produce a price...
i hope i can have explanation about how to find the ans.8 8. Valuing Callable Bonds Canton Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 7 percent payable annually. The one-year interest rate is 7 percent. Next year, there is a 35 percent probability that interest rates will increase to 9 percent, and there is a 65 percent probability that they will fall to 6 percent a. What will the market value of...
Show all work please. True/False 7 points each. Circle the correct answer. Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity. True False An annuity is a series of equal payments at equal time intervals. True False Multiple Choice 5 points each. Circle the correct answer. 74. Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with...
A firm issues two bonds with 20-year maturities. Both are callable at $1,050. The first bond is issued at a deep discount to par with a coupon rate of 4% and a price of $580 to yield 8.4%. The second is issued at par with a coupon rate of 8.9%. What is the yield-to-maturity of the par bond? If you expect rates to fall substantially in the next 2 years, which bond would you prefer to hold? In what sense...
Two bonds have identical times to maturity and coupon rates. One is callable at 105, the other at 110. Which should sell at a higher price? The bond callable at 105 The bond callable at 110 Both bonds should sell at the same price Do not have enough information to answer this question
Use the following information for questions 6-11. A BB+ rated firm (0.8., a high yield or non-investment grade) has issued a callable bond with the following features: • Exactly 2 years to maturity • 9% annual coupon • $100 par value • The bond is callable in exactly one year for par value. 6. Relative to a non-callable bond with identical features, the price of the callable bond will be a. Lower, because the buyer of the bond is also...
Tucker Corporation plans to issue new 20-year bonds that are callable after 5 years at a call premium of $1,050. Suppose this bond has a face value of $1,000 the price is currently $1,000. The coupon rate is 10% which is paid semiannually. Does the yield to maturity exceed the yield to call on this bond? a. Yes b. No c. Not enough information