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  #41  
Old 10-14-2006, 12:51 AM
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Default Exercise for October 14, 2006

It is posted at:
http://www.math.ilstu.edu/krzysio/KO-FM-Exercise74.pdf

Yours,
Krzys' Ostaszewski
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  #42  
Old 10-16-2006, 10:41 AM
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Default a question on the Practice exam 5 #21 (December 2005 edition)

This is a premium bond because the coupon rate is 4%, which is greater than i, where the interest i=3.5%. Since it's a premium bond, we want the redemption date to be the earliest possible date, right? I don't understand why the answer isn't 111.25 (t=10)? Thank you!
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  #43  
Old 10-16-2006, 10:48 AM
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well, I have no idea what the question is, but... are the redemption values equal? the Premium Early, Discount Late rule only is guaranteed with equal redemption values...
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  #44  
Old 10-17-2006, 02:56 PM
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Default Premium bond?

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Originally Posted by yesactuary View Post
This is a premium bond because the coupon rate is 4%, which is greater than i, where the interest i=3.5%. Since it's a premium bond, we want the redemption date to be the earliest possible date, right? I don't understand why the answer isn't 111.25 (t=10)? Thank you!
The call price is not par, but at substantial premium. In your reasoning, you assume that the bond is called at par, and that is clearly not the case. The solution provided in the manual explains every step, could you please read it, and then tell me please where you stop understanding. I will try to help then.

Does my answer make sense?

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Krzys'
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  #45  
Old 10-17-2006, 04:04 PM
yesactuary yesactuary is offline
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Quote:
Originally Posted by krzysio View Post
Quote:
Originally Posted by yesactuary View Post
This is a premium bond because the coupon rate is 4%, which is greater than i, where the interest i=3.5%. Since it's a premium bond, we want the redemption date to be the earliest possible date, right? I don't understand why the answer isn't 111.25 (t=10)? Thank you!
The call price is not par, but at substantial premium. In your reasoning, you assume that the bond is called at par, and that is clearly not the case. The solution provided in the manual explains every step, could you please read it, and then tell me please where you stop understanding. I will try to help then.

Does my answer make sense?

Yours,
Krzys'
"For example, if the investor pays $108 for the bond, this investor will make more than 3.5% if the bond is called before maturity, but will make less than 3.5% if the bond is held to maturity..."

I didn't understand this explanation in the solution, but I got it now. I like this problem. Thanks, Krzys'.

if price=111.25, c=100, Fr=4, n=20, then, i=3.22% < 3.5%.
if price=107.11, c=100, Fr=4, n=15, then, i=3.38% > 3.5%.
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  #46  
Old 10-19-2006, 09:03 AM
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Question option-free bond?

Hi Krzys', could you explain to me what is option-free bond? Thank you again.
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  #47  
Old 10-19-2006, 09:05 AM
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Hi Krzys', could you explain to me what is option-free bond? Thank you again.
Not 100% sure if this is common language, but from my memory, it's simply that, a bond with no options. Now, the only option that I can think that we would be responsible for is a call option, so my guess is that it's a bond that cannot be called prior to the redemption date. Does that match up with the context you see it in?

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  #48  
Old 10-20-2006, 09:16 PM
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Default Option-free bond

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Quote:
Originally Posted by yesactuary View Post
Hi Krzys', could you explain to me what is option-free bond? Thank you again.
Not 100% sure if this is common language, but from my memory, it's simply that, a bond with no options. Now, the only option that I can think that we would be responsible for is a call option, so my guess is that it's a bond that cannot be called prior to the redemption date. Does that match up with the context you see it in?

Yes, you are correct.
Yours,
Krzys'
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  #49  
Old 10-20-2006, 09:17 PM
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Default Sugar-free, option-fee, etc.

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Hi Krzys', could you explain to me what is option-free bond? Thank you again.
Just like sugar-free contains no sugar, option-free contains no options. Does that not make sense?

Yours,
Krzys' Ostaszewski
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  #50  
Old 10-20-2006, 09:42 PM
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Quote:
Originally Posted by krzysio View Post
Quote:
Originally Posted by yesactuary View Post
Hi Krzys', could you explain to me what is option-free bond? Thank you again.
Just like sugar-free contains no sugar, option-free contains no options. Does that not make sense?

Yours,
Krzys' Ostaszewski

so it's same as non-callable bond?
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