Call options are frequently attached to bonds,making them callable at the option of the issuer.Consider a firm that just issued two sets of bonds:
One is callable,has a 7 percent coupon rate,15 years to maturity,and cannot be called during the first three years; the second is noncallable,has a 7 percent coupon rate,15 years to maturity,and is identical to the first bond in every way except for the call option.Suppose the noncallable bonds are sold for $1,000 each.Will the callable bonds sell for more or less than $1,000?
Who "purchases" the option in this case and who "sells" it?

Question

Call options are frequently attached to bonds,making them callable at the option of the issuer.Consider a firm that just issued two sets of bonds:
 One is callable,has a 7 percent coupon rate,15 years to maturity,and cannot be called during the first three years; the second is noncallable,has a 7 percent coupon rate,15 years to maturity,and is identical to the first bond in every way except for the call option.Suppose the noncallable bonds are sold for $1,000 each.Will the callable bonds sell for more or less than $1,000?
 Who "purchases" the option in this case and who "sells" it?

Quizplus · Accepted Answer

The Answer of Call options are frequently attached to bonds,making them callable at the option of the issuer.Consider a firm that just issued two sets of bonds:
 One is callable,has a 7 percent coupon rate,15 years to maturity,and cannot be called during the first three years; the second is noncallable,has a 7 percent coupon rate,15 years to maturity,and is identical to the first bond in every way except for the call option.Suppose the noncallable bonds are sold for $1,000 each.Will the callable bonds sell for more or less than $1,000?
 Who "purchases" the option in this case and who "sells" it?

Call Options Are Frequently Attached to Bonds,making Them Callable at the Option