1.Success bond is a callable bond with 5.75% coupon rate and a maturity of 3 years. The bond is callable at par since issuance. A binomial interest rate tree for a non-callable Success bond is shown below. The probability of each interest rate move in the tree is 50%. The current price of the Success callable bond is closest to:
2. With the assumption of 10% interest rate volatility, the estimated value of Success callable bond is $103.01. The binomial interest rate tree for valuation is shown as below. If the interest rate volatility is 20%, the price of the Success callable bond is closest to:
3. When the yield curve is downward sloping, che forward curves are most likely tolie:
A. above rhe spot curve.
B. below rhe spot curve.
C. either above or below the spot curve.
4. An increase in interest rate volatility:
A. increases the value of bonds with embedded call options.
B. increases the value of bonds wich embedded put options.
C. increases the value of low-coupon bonds with embedded options, butdecreases the value of high-coupon bonds with embedded options.
5. The option adjusted spread (OAS) on a callable corporate bond is 73 basis points using on-the-run Treasuries as the benchmark races in the construction ofthe binomial tree. The best interpretation of chis OAS is the:
A. cost of the embedded option is 73 basis points.
B. cost of the option is 73 basis points over Treasury.
C. spread that reflects the credit risk is 73 basis points over Treasury.
6. Which of the following statements concerning a comparison between the riskand return of convertible bond investing versus common stock investing is leastaccurate, assuming interest rates are stable?
A. When stock prices fall, the returns on convertible bonds are likely to exceedthose of the stock because the convertible bond's price has a floor equalto the straight bond value.
B. The main drawback of investing in convertible bonds versus direct stockpurchases is that when stock prices rise, the convertible bond will likelyunderperform the stock due to the conversion premium.
C. Buying convertible bonds instead of direct stock investing limits upsidepotential to that of buying a straight bond, at the cost of increased downsiderisk due to the conversion premium.