Consider a bond with a face value of \(\$ 1,000\) and coupon payment at the end of each period \(k\) given by a rate \(c_{k}=\max \left[6 \%-r_{k}, 0\right]\), where \(r_{k}\) is the short rate for period \(k\). This type of bond is called an inverse floater.

The one-period spot rate is currently \(4 \%\), and at each period it will either increase 1.5 times or remain constant. The risk-neutral probability implied by the current term structure is 0.5 . What is the price of an inverse floater maturing two periods from now? Note there are two coupon payments, with the first being paid one period from now.