1. For an IBM bond with 6% coupon rate (annual coupon poayment), two year to maturity,...
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1. For an IBM bond with 6% coupon rate (annual coupon poayment), two year to maturity, par value of $1,000, and selling at $1018. Assume that one-year rates undergo a lognormal random walk with volatility σ, and σ is assumed to be 12%. It is given that the one-year spot rate today is 5.03%. (a) Calculate the one-year forward rate one year from now in low state using binomial model. (b) Calculate the value of the IBM bond in the question if the coupon rate changes to 7% using binomial model. (c) Calculate the value of the IBM bond in the question assuming it is callable at price of $1000. (d) Calculate the value of the IBM bond in the question assuming it is putable at price of $1000. (a) (b) (c) (d) 1. For an IBM bond with 6% coupon rate (annual coupon poayment), two year to maturity, par value of $1,000, and selling at $1018. Assume that one-year rates undergo a lognormal random walk with volatility σ, and σ is assumed to be 12%. It is given that the one-year spot rate today is 5.03%. (a) Calculate the one-year forward rate one year from now in low state using binomial model. (b) Calculate the value of the IBM bond in the question if the coupon rate changes to 7% using binomial model. (c) Calculate the value of the IBM bond in the question assuming it is callable at price of $1000. (d) Calculate the value of the IBM bond in the question assuming it is putable at price of $1000. (a) (b) (c) (d)
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Anwers a The oneyear forward rate one year from now in a low state can be calculated using the binomial model The binomial model assumes that the shor... View the full answer
Related Book For
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
Posted Date:
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