KrishjjjPro
Chptr- valuation of option emb bonds My value for an option free bond is coming out to be 100.19.is there error with the solution
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The value of the option free bond is as follows:
(6/1.062) + (6/1.062*1.063) + (6/1.062*1.063*1.0686) + (106/1.062*1.063*1.0686*1.0589)
= 98.9191
Now the bond is puttable at the end of year 2 and 3 at par i.e. 100
So, At the end of Year 4 = 106
At the end of Year 3 = 106 / 1.0589 = 100.1039 (The bond will not be put by investor)
At the end of Year 2 = 100.1039 + 6 / 1.0686 = 99.2924 (The bond will be put by investor)
At the end of Year 1 = 100 + 6 / 1.063 = 99.7178
Value today = 99.7178 + 6 / 1.062 = 99.5459
So, Value of Put = 99.5459 – 98.9191 = 0.6268 = 0.63 approx.