What is the issue price of a puttable note, with a par put after one year on a 2year annual pay 5% coupon note, given that the interest rate at present is 5.2% and in one year wil be 5.5% or 4.7%.
a) 99.895
b) 99.946
c) 100.27
This is a Q off schweser 2012 mock (afternoon Q 44) but i didn’t understand the answer which was B. Please can someone clarify how the answer is reached?
kyh, that’s way too complicated!! No need for calculator.
Just set up the tree and discount each value (price+coupon) by interest rate with 50% probability to each. Adjust price upwards if less than $100. It takes 1 minute to do this.