问题如下:
3. Method 1 would most likely not be an appropriate valuation technique for the bond issued by:
选项:
A. Hutto-Barkley Inc.
B. Luna y Estrellas Intl.
C. Peaton Scorpio Motors.
解释:
B is correct.
The Luna y Estrellas Intl. bond contains an embedded option. Method 1 will produce an arbitrage-free valuation for option-free bonds; however, for bonds with embedded options, changes in future interest rates impact the likelihood the option will be exercised and so impact future cash flows. Therefore, to develop a framework that values bonds with embedded options, interest rates must be allowed to take on different potential values in the future based on some assumed level of volatility (Method 2).
A and C are incorrect because the Hutto-Barkley Inc. bond and the Peaton Scorpio Motors bond are both option-free bonds and can be valued using either Method 1 or Method 2 to produce an arbitrage-free valuation.
Therefore, to develop a framework that values bonds with embedded options, interest rates must be allowed to take on different potential values in the future based on some assumed level of volatility (Method 2). 可以结合题目解释下这句话吗?谢谢