Assignment:
Suppose that the yield curve on bonds that are free of the risk of default is flat at 5% per year. a 20 year default-free coupon bond (with annual coupons and $1,000 face value) that becomes callable after 10 years is trading at par and has a coupon rate of 5.5%
Questions:
1) What is the implied value of the call provision?
2) A Safeco Corporation bond, which is otherwise identical to the callable 5.5% coupon bond just described, is also convertible into 10 shares of Safeco stock at any time up to the bond's maturity. if its yield to maturity is currently 3.5% per year, what is the implied value of the conversion feature?