What are the two drawbacks of the traditional approach to the valuation of bonds with embedded options?
Answer to relevant QuestionsExplain why you agree or disagree with the following statement: “An investor should be unwilling to pay more than the call price for a bond that is likely to be called.” Answer the below questions. (a) What is meant by the option-adjusted spread? (b) What is the option-adjusted spread relative to? What is negative convexity? Suppose that a support bond is being analyzed using the Monte Carlo simulation methodology. The theoretical value using 1,500 interest-rate paths is 88. The range for the path present values is a low of 50 and a high of 115. ...What are the limitations of the option-adjusted spread measure?
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