1. True or False: _______ If I purchase a callable bond, this is economically equivalent to purchasing a bond and buying a call option on that same bond.

2. Assume that you value a callable bond and a non-option bond that have the same time to maturity, credit risk, coupon rate, and cash flows.

You calculate a price of $102 for the callable bond and $101.50 for the non-callable bond. Explain why your calculation must be wrong.

3. Assume that you value a putable bond and a non-option bond that have the same time to maturity, credit risk, coupon rate, and cash flows.

You calculate a price of $102 for the putable bond and $101.50 for the non-putable bond. Explain why your calculation must be right.

4. Answer good or bad. For the owner of a callable bond, high volatility is a ____ thing.

5. Answer good or bad. For the owner of a putable bond, high volatility is a _____ thing.

6. Fill in the missing cells for the following 2 period, 5%, putable bond. Assume volatility is 20% and that the bond is putable at 101.

							VHH	100
						NHH	C	5
				VH
			NH	C	5
				rH
	V						VHH	100
N	C	0				NHL	C	5
	r0	4.50%
				VL
			NL	C	5
				r1	3.828%
							VLL	100
						NLL	C	5