A pension fund manager anticipates the purchase of a 20-year, 8 percent coupon Treasury bond at the
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A pension fund manager anticipates the purchase of a 20-year, 8 percent coupon Treasury bond at the end of two years. Interest rates are assumed to change only once every year at year-end, with an equal probability of a 1 percent increase or a 1 percent decrease. The Treasury bond, when purchased in two years, will pay interest semiannually. Currently, the Treasury bond is selling at par.
What is the option premium? (Use an 8 percent discount factor.)
CouponA coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
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Related Book For
Financial Institutions Management A Risk Management Approach
ISBN: 978-1259717772
9th edition
Authors: Anthony Saunders, Marcia Millon Cornett
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