On May 26, 1991, Svensk Exportkredit (SEK), the Swedish export credit corporation, issued a Bull Indexed Silver Opportunity Note (BISON). Consider an extended version of this BISON issue that has the following terms:
Maturity ............ May 26, 1993
Coupon ........... 6.50%, paid annually in arrears
Face value .......... USD 30 million
Purchase price ......... 100,125% of par value
Additionally, this BISON includes a redemption feature that, for each USD 1,000 of face value held at maturity, repays the investor’s principal according to the following formula:
USD 1,000 + [(Spot Silver Price per Ounce − USD 4.46) × (USD 224.21525)]
a. Demonstrate that, from SEK’s perspective, the BISON represents a combination of a straight debt issue priced at a small premium and a derivative contract. Be explicit as to the type of derivative contract and the underlying asset on which it is based. What implicit speculative position are the investors who buy these bonds taking?
b. Calculate the yield to maturity for an investor holding USD 10,000 in face value of these BISON if the May 1993 spot price for silver is (1) USD 4.96 per ounce, or (2) USD 3.96 per ounce.
c. In May 1991 (i.e., when the BISON were used), the prevailing delivery price on a two-year silver futures contract was USD 4.35 per ounce. If SEK wanted to hedge its BISON-related exposure to silver prices with an offsetting futures position at this price, what type of position would need to be entered? Ignoring margin accounts and underwriting fees, calculate SEK’s average annualized borrowing cost of funds for the resulting synthetic straight bond.

  • CreatedDecember 17, 2014
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