At one point, some Treasury bonds were callable Consider the prices on the following three Treasury issues as of May 15, 2016 6 95 May 20 n 106 59375 106 65625 31250 5 37 8 70 May 20 103 71875 103 78125 06250 5 33 12 45 May 20 143 87500 144 06250 37500 5 41 The bond in the middle is callable in February 2017 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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Question: At one point, some Treasury bonds were callable. Consider the prices on the following three Treasury issues as of May 15, 2016: 6.95 May 20

At one point, some Treasury bonds were callable. Consider the prices on the following three Treasury issues as of May 15, 2016:


6.95	May	20	n	106.59375	106.65625	?	.31250	5.37
8.70	May	20		103.71875	103.78125	?	.06250	5.33
12.45	May	20		143.87500	144.06250	?	.37500	5.41

The bond in the middle is callable in February 2017. 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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