Suppose that the Johnson family has the option of purchasing two bonds.
• Bond A is a $4000 10% 10 year bond paying annual coupons with redemption value $2000, which can be purchased at a premium for $3000. This bond can optionally be sold at the end of the 5th year for 6,000.
• Bond B is a $4000 10% 10 year bond paying annual coupons with redemption value $3000, which can be purchased at a discount for $2000. Suppose further that this bond has a lockout period of 5 years, after which a put option can be placed at the end of years {6,7,8,9} for put premium of $150.
Which bond would you recommend to Johnson family. Why?