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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