The Following Information Relates to Questions 28-36Jules Bianchi Is a Bond

question 18

Multiple Choice

The following information relates to Questions 28-36Jules Bianchi is a bond analyst for Maneval investments, inc. Bianchi gathers data on three
corporate bonds, as shown in Exhibit 1.EXHiBiT 1 Selected Bond dataissuer Coupon Rate Price Bond description Ayrault, inc. (Ai) 5.25% 100.200 Callable at par in one year and twoyears from today Blum, inc. (Bi) 5.25% 101.300 option-free Cresson Enterprises (CE) 5.25% 102.100 Putable at par in one year from todayNote: Each bond has a remaining maturity of three years, annual coupon payments, and a credit rating of BBB.
To assess the interest rate risk of the three bonds, Bianchi constructs two binomial interest rate trees based on a 10% interest rate volatility assumption and a current one-year rate of 1%.Panel A of Exhibit 2 provides an interest rate tree assuming the benchmark yield curve shifts down by 30 bps, and Panel B provides an interest rate tree assuming the benchmark yield curve
shifts up by 30 bps. Bianchi determines that the Ai bond is currently trading at an option-ad-justed spread (oAS) of 13.95 bps relative to the enchmark yield curve.EXHiBiT 2 Binomial interest Rate Trees
$\text { Panet a interest Kates shit Down by so bps }$


$\text { Panel B: Interest Rates Shift Up by } 30 \text { bps }$

Armand Gillette, a convertible bond analyst, stops by Bianchi's office to discuss two con-vertible bonds. one is issued by delille Enterprises (dE) and the other is issued by Raffarin incorporated (Ri) . Selected data for the two bonds are presented in Exhibits 3 and 4.
EXHIBIT 3 Selected Data for DE Convertible Bond
$\begin{array}{ll}\hline\text { Issue price } & € 1,000 \text { at par } \\\text { Conversion period } & 13 \text { September } 20X 5 \text { to } 12 \text { September 20X8 } \\\text { Initial conversion price } & € 10.00 \text { per share } \\\text { Threshold dividend } & € 0.50 \text { per share } \\\text { Change of control conversion price } & € 8.00 \text { per share } \\\text { Common stock share price on issue date } & € 8.70 \\\text { Share price on 17 September 20X5 } & € 9.10 \\\text { Convertible bond price on } 17 \text { September 20X5 } & € 1,123\\\hline\end{array}$

EXHIBIT 4 Selected Data for RI Convertible Bond
$\begin{array}{llcc} \hline\text {Straight bond value } &€ 978 \\ \text { Value of embedded issuer call option} &€ 43 \\ \text { Value of embedded investor put option } &€ 26\\ \text { Value of embedded call option on issuer's stock } & € 147\\ \text { Conversion price } &€ 12.50 \\ \hline\text {Current common stock share price } &€ 11.75\\\end{array}$

Gillette makes the following comments to Bianchi:
• "The dE bond does not contain any call or put options but the Ri bond contains both an embedded call option and a put option. i expect that delille Enterprises will soon announce a common stock dividend of €0.70 per share."
• "My belief is that, over the next year, Raffarin's share price will appreciate toward the con-version price but not exceed it."
-Based on Exhibits 1 and 2, the effective duration for the Ai bond is closest to:

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