Question: Below is the information sheet for 2 option-embedded bonds. Characteristic Value for Bond 1 Value for Bond 2 Type Government Corporate Maturity 4 years 4

Below is the information sheet for 2 option-embedded bonds. Characteristic Value

Below is the information sheet for 2 option-embedded bonds. Characteristic Value for Bond 1 Value for Bond 2 Type Government Corporate Maturity 4 years 4 years Coupon rate 6 % 6 % Compounding Annual Annual Yield to maturity ??? ??? Callable? Yes Yes Call strike 100.50 100.50 A. What is the price of a government bond that is callable in year 2 and 3 with a strike of 100.50. Use the 1-year forward rate tree provided below: Today Year 1 Year 2 Year 3 2.172% 2.291% 2.269% 3.581% 2.000% 3.778% 3.741% 5.904% 6.229% 9.735% B. If the price of the corporate bond is $103 - $4, what is the option-adjusted spread? [3 marks] C. Which bond would have higher convexity: a puttable bond or a vanilla bond that is otherwise identical to the puttable bond? Explain why. Below is the information sheet for 2 option-embedded bonds. Characteristic Value for Bond 1 Value for Bond 2 Type Government Corporate Maturity 4 years 4 years Coupon rate 6 % 6 % Compounding Annual Annual Yield to maturity ??? ??? Callable? Yes Yes Call strike 100.50 100.50 A. What is the price of a government bond that is callable in year 2 and 3 with a strike of 100.50. Use the 1-year forward rate tree provided below: Today Year 1 Year 2 Year 3 2.172% 2.291% 2.269% 3.581% 2.000% 3.778% 3.741% 5.904% 6.229% 9.735% B. If the price of the corporate bond is $103 - $4, what is the option-adjusted spread? [3 marks] C. Which bond would have higher convexity: a puttable bond or a vanilla bond that is otherwise identical to the puttable bond? Explain why

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