Topic_18_E2

Topic_18_E2 - Topic 18, Exercise 2 Synthetic Debt The...

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Topic 18, Exercise 2 Synthetic Debt The investment banking firms and major corporations have worked together to use derivatives to implement financing strategies that reduce costs and or risks associated with traditional instruments. This activity is generally known as structured finance or financial engineering. It involves the combination of traditional instruments and derivative instruments such as options. One such instrument, called putable/callable reset bonds or term enhanced marketable securities, is described in a recent article entitled, “Can Synthetic Debt Give Authentic Savings?” After reading the article, answer the following questions: 1. What are putable/callable reset bonds? Putable/callable reset bonds have both an embedded put and call. The normal instrument has a nominal maturity of 10 years but has a mandatory put provision requiring the issuer to put the bond back on the issuer if interest rates have risen since the time of issue. The
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