27: Bonds w/ Embedded Options

Question 1

Style of option:

Option can be exercised at any time after the protection period

Answer 1

American Style

Question 2

Style of option:

Option can be exercised at fixed dates, after the protection period

Answer 2

Bermuda style

Question 3

Style of option:

Option can only be exercised on a single day, immediately after the protection period

Answer 3

European style

Question 4

Coupon:

1 year
reference rate
annually
set in arrears

Answer 4

Floating rate bond
(duration will be close to length of reference rate (1 year)

Question 5

Effective duration indicates the sensitivity of a bond’s price to a:

(assuming no change in the bond’s credit spread)

Answer 5

100 bps parallel shift of the benchmark yield curve

Question 6

For an option free bond:
one-sided up-duration & one-sided down-duration will be:

Answer 6

about equal

Question 7

Key rate duration captures interest rate sensitivity to changes in par rates at:

Answer 7

specific maturities

Question 8

Convertible Bonds are more challenging to value, than callable, because:

Answer 8

must consider the impact of economic conditions that affect both:
the value of the callable bond
&
the value of the common stock