Super Bank purchases a $100 zero-coupon bond with 2 years to maturity at $80,44. This means YTM
Fantastic news! We've Found the answer you've been seeking!
Question:
- Super Bank purchases a $100 zero-coupon bond with 2 years to maturity at $80,44. This means YTM = 11,5%. Market yield on 1-year bonds is 10% and forecast for next year's 1-year rate is that rates will rise to either 13,82% (scenario A) or 12.18% (Scenario B). The two scenarios are equally probable. To limit their risks, Super Bank decides to buy an European put on the bond with strike price $88,60 and maturity of 1 year from now.
- If Super Bank need to sell the bond after 1 year from now what are the two possible bond price under each of the scenarios?
- What is the expected price of the bond after 1 year from now?
- What is the maximum value of the put 1 year from now, given only the two scenarios are possible?
- What is the current value of the put (today)?
(accuracy of $0,01 for all tasks in Question I)
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date: