A BB+ rated firm (e.g., a high yield or non-investment grade) has issued a callable bond with the following features: Exactly 2 years to maturity 9% annual coupon $100 par value The bond is callable in exactly one year for par value. 8. (10 pts.) Suppose you are given the following set of spot rates:
Time Period Oyly Oy2y Oy3y Rate 6% .035% 8.111% 7 From these spot rates you infer the following forward rates: Time Period lyly 2yly Rate 8.081% 10.295% What is the price of the bond if you expect no uncertainty (e.g., zero volatility) in future interest rates? Restated, what is the price of the callable bond if the future interest rates equal the current forward rates. Show all your work below.
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