Question: At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2017: 05/15/2020 7.00

At one point, certain U.S. Treasury bonds were callable.

Consider the prices in the following three Treasury issues as of May 15, 2017:

05/15/2020 7.00 109.03125 109.09375 .31250 3.770

05/15/2020 8.05 109.56250 109.62500 .09375 4.580

05/15/2020 9.35 114.62500 114.81250 .46875 4.060

The bond in the middle is callable in February 2018. What is the implied value of the call feature? Assume a par value of $1,000. (Hint: Is there a way to combine the two noncallable issues to create an issue that has the same coupon as the callable bond?)

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