A Commodity Linked Bond Is Issued with an Embedded Call

question 18

Multiple Choice

A commodity linked bond is issued with an embedded call option.The current commodity price is $52,as is the exercise price on the call option.The call option is priced at $5.56.If the promised payment on the bond is the same as the issue price of $40,what is the yield on the bond if effective interest rates are 4.0% and the bond has a 1-year maturity?

• A) 2.24%
• B) 2.80%
• C) 3.50%
• D) 4.0%

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Definitions:

Radiation of Fishes

The diversification of fish species over time and environments, leading to a variety of adaptations and forms.

Mammal-like Reptiles

Extinct vertebrates that share both mammalian and reptilian traits, bridging an evolutionary gap between reptiles and mammals.

Carboniferous Period

A geologic period and system that spans from about 358.9 to 298.9 million years ago, known for its extensive coal deposits formed from ancient forests.

Tiktaalik

An extinct genus of fish-like tetrapods that represents an early step in the transition from water- to land-living animals.