Can anyone confirm that there’s an error in this problem? The answer is valuing the bond such that the call price is 100, but the vignette gives 101 as the call price. Therefore the answer should be C, not B (given). ?
there is an error, i think call price is 100
“The bonds are currently callable at 101, and beginning in six months, they are callable at par.”
i haven’t seen the question, but does spunboy’s answer above help? Is it asking for a value after 6 months and therefore you use the par call price?
It’s asking for a value for an interest rate tree, the vignette says that the bond can be called away at 101, but the answer given calculates it as if the bond can be called away at 100.
right, so after 6mo they can be called at par, as stated in the vignette. so at the 1 year and 2 year node the max price is par, not 101 since it’s past 6mo
The vignette says that it can be called away at 101, not par.
sorry for my misinformation. i remember the q, but hadn’t looked at it in a while.
I don’t follow the issue here, the vignette very clearly states that the call price is 100 in 6 months time. When you value the bond at the Year 1 node (which is after 6 months) you MUST use the 100 call price. Read the question, it’s very clear that the call price is NOT 101 in Year 1.