Consider the two investments shown in the table. Find the present ...

[2125004343]

Consider the two investments shown in the table. Find the present value of each at Year 0 assuming an interest rate of 5.
 
  What is the percentage difference in the present values (with Investment 1 as the base of the percentage)?
 
  Year Investment 1 Investment 2
  0 0 0
  1 100 100
  2 100 1,100
  3 1,100 0
 
  A) -3.8
  B) -2.6
  C) 3.5
  D) 4.3
  E) -4

Question 2

Callable and putable bonds add options to an ordinary bond. These options may be exercised at the discretion of the bondholder in one type, or the bond issuer in the other. Describe callable and putable bonds.
 
  In your description, be sure to include which party has the option to exercise, and the impact of the option on the price of the bond.
  What will be an ideal response?

[trog]

Answer to Question 1

A

Answer to Question 2

Answer: Callable bonds provide an option to the bond issuer to call in the bond prior to maturity at a contractually agreed-upon price during specific time periods. The bond issuer would exercise such an option when interest rates are falling so that debt can be reissued at a lower cost. Thus the price of a callable bond is lower than an otherwise equal bond without the call option attached.

Putable bonds provide an option to the bondholder to sell the bond back to the issuer prior to maturity at a contractually agreed-upon price during specific time periods. The bondholder would exercise such an option when interest rates are rising. Thus the price of a putable bond is higher than an otherwise equal bond without the put option attached.