The term structure of interest rates is flat at 4.3 %, but rates could change...
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The term structure of interest rates is flat at 4.3 %, but rates could change immediately to 6.3 % or 2.3 % with probability of 0.48 and 0.52 , respectively, and stay at that level forever. You purchase a putable bond with 30 years to maturity, 4.3 % coupon paid annually and par value of $100. The putable bond can be put at $ 98 immediately.
what is the expected price of a straight bond with same characteristics of this putable bond?
what is the yield spread of the putable bond over the straight bond with same characteristics?
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