Question

At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2017:

05/15/2020		6.95				109.00000		109.06250		−	.31250		3.730
05/15/2020		8.00				109.53125		109.59375		−	.09375		4.540
05/15/2020		9.45				114.59375		114.78125		−	.46875		4.160

The bond in the middle is callable in February 2018. What is the implied value of the call feature? Assume a par value of $1,000. (Hint: Is there a way to combine the two noncallable issues to create an issue that has the same coupon as the callable bond?) (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1