A straight 5% coupon bond has 2 yrs remaining to maturity and is priced at $981.67 ($1,000 par value). All else the same, a putable bond is priced at 101.76 (% of par value). With the yield curve @6%, what’s the value of the embedded put option?
Isn’t it just 101.76 - 98.167 = $3.59?
putable bond value = value of an option-free bond + value of the embedded put option putable bond value - value of an option-free bond = value of the embedded put option $1,017.6 (101.76% of $1000) - $981.67 = $35.93
$35.93 is the correct answer. Thx much, ThealiMan.