An investor purchases a 10-year AA corporate bond that is puttable to the issuer at year 5.
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Question:
An investor purchases a 10-year AA corporate bond that is puttable to the issuer at year 5. The puttable bond yields 7.00% pa (versus the comparable yield on conventional ten year non-puttable 10-year AA corporate bond of 7.5% pa).
How to monetize the puttable right using a swaption? Describe the nature of payoff of the swaption.
What would be the option premium charged on the swaption per annum in order that it is more advantageous for the investor to own the puttable bond (which has a lower yield than that of its non-puttable counterpart)?
Related Book For
Fundamentals of Investment Management
ISBN: 978-0078034626
10th edition
Authors: Geoffrey Hirt, Stanley Block
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