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Question
A commodity linked bond is issued with an embedded call option. The current commodity price is $52, as is the exercise price on the call option. The call option is priced at $5.56. If the promised payment on the bond is the same as the issue price of $40, what is the yield on the bond if effective interest rates are 4.0% and the bond has a 1-year maturity?A) 2.24%
B) 2.80%
C) 3.50%
D) 4.0%
Answer
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