Question

At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2017: 05/15/2020 6.50 108.71875 108.78125 − .31250 3.400 05/15/2020 7.55 109.25000 109.31250 − .09375 4.210 05/15/2020 8.05 114.31250 114.50000 − .46875 2.960 The bond in the middle is callable in February 2018. What is the implied value of the call feature? Assume a par value of $1,000. (Hint: Is there a way to combine the two noncallable issues to create an issue that has the same coupon as the callable bond?) (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The implied value of called feature is $111.49 approx

Step-by-step explanation:

Detailed step wise solution is given below: