Table of Interest Rates: Time Period Oyly Oy2y Oy3y lyly 2yly Consider the following bond: ...

 

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Table of Interest Rates: Time Period Oyly Oy2y Oy3y lyly 2yly Consider the following bond: • Exactly 3 years to maturity • 9.7% coupon rate, paid annually • $100 par value • Bond is callable in exactly 1 year for 101.5 and exactly 2 years for 100.5. 6. Suppose that there is zero volatility in interest rates. Restated, suppose that future interest rates equal current market expectations. What is the price of the callable bond? Round your answer to three decimal places. 7. Now suppose that future interest rates are uncertain. Specifically, there is 15% volatility in underlying interest rates with 50/50 likelihood that the rate increases or decreases. The rates evolve as follows: Rate from 1-0 to 1-1 3.00% Rate from 1-1 to 1-2 Rate 3.00% 4.80% 6.30% 6.63% 9.37% 7.63% 5.65% Rate from 1-2 to 13 12.43% 9.21% 6.82% What is the price of the callable bond in this scenario per 100 of par value? Round your answer to three decimal places. 8. What is the investor's annualized rate of return on the callable bond if interest rates increase in both 1 and 2 years (e.g., the 1-year rate at time 1 is 7.63 %, the 1-year rate at time 2 is 12.43%)? Express your answer as a percentage and round your answer to three decimal places. 9. What is the investor's annualized rate of return on the callable bond if interest rates decrease in both 1 and 2 years (e.g., the 1-year rate at time 1 is 5.65%, the 1-year rate at time 2 is 6.82%)? Express your answer as a percentage and round your answer to three decimal places. 10. Which types of firms would you expect to issue callable bonds and why? a. Riskier, younger firms because they have higher interest rates initially and thus more room for them to fall b. Riskier, younger firms because investors prefer these firms c. Older, safter firms because they have more room for their interest rates to increase d. Older, safer firms because their interest rates are lower Table of Interest Rates: Time Period Oyly Oy2y Oy3y lyly 2yly Consider the following bond: • Exactly 3 years to maturity • 9.7% coupon rate, paid annually • $100 par value • Bond is callable in exactly 1 year for 101.5 and exactly 2 years for 100.5. 6. Suppose that there is zero volatility in interest rates. Restated, suppose that future interest rates equal current market expectations. What is the price of the callable bond? Round your answer to three decimal places. 7. Now suppose that future interest rates are uncertain. Specifically, there is 15% volatility in underlying interest rates with 50/50 likelihood that the rate increases or decreases. The rates evolve as follows: Rate from 1-0 to 1-1 3.00% Rate from 1-1 to 1-2 Rate 3.00% 4.80% 6.30% 6.63% 9.37% 7.63% 5.65% Rate from 1-2 to 13 12.43% 9.21% 6.82% What is the price of the callable bond in this scenario per 100 of par value? Round your answer to three decimal places. 8. What is the investor's annualized rate of return on the callable bond if interest rates increase in both 1 and 2 years (e.g., the 1-year rate at time 1 is 7.63 %, the 1-year rate at time 2 is 12.43%)? Express your answer as a percentage and round your answer to three decimal places. 9. What is the investor's annualized rate of return on the callable bond if interest rates decrease in both 1 and 2 years (e.g., the 1-year rate at time 1 is 5.65%, the 1-year rate at time 2 is 6.82%)? Express your answer as a percentage and round your answer to three decimal places. 10. Which types of firms would you expect to issue callable bonds and why? a. Riskier, younger firms because they have higher interest rates initially and thus more room for them to fall b. Riskier, younger firms because investors prefer these firms c. Older, safter firms because they have more room for their interest rates to increase d. Older, safer firms because their interest rates are lower