Consider a 5-year equity-linked note that pays one share of XYZ at maturity. The price of XYZ today is $100, and XYZ is expected to pay its annual dividend of $1 at the end of this year, increasing by $0.50 each year. The fifth dividend will be paid the day before the note matures. The appropriate discount rate for dividends is a continuously compounded risk-free rate of 6%.
Suppose that the day after the note is issued, XYZ announces a permanent dividend increase of $0.25. What happens to the price of the equity-linked note?
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