2. Suppose you observe a binomial tree of 6-month risk-free spot rates and the spot rates...

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2. Suppose you observe a binomial tree of 6-month risk-free spot rates and the spot rates shown below. Using true probability, what is the current price of a 12-month bond at to if the bond has a face value of $800 and pays $40 per period? (18pt) Period 1 Years 0.5 2 1.0 3 1.5 Annualized Spot Rate 4% 4.15% 4.25% to t1 t2 5.5% 50% 50% 5.0% 50% 4.5% 4.5% 50% 50% 4.0% 50% 3.5% 2. Suppose you observe a binomial tree of 6-month risk-free spot rates and the spot rates shown below. Using true probability, what is the current price of a 12-month bond at to if the bond has a face value of $800 and pays $40 per period? (18pt) Period 1 Years 0.5 2 1.0 3 1.5 Annualized Spot Rate 4% 4.15% 4.25% to t1 t2 5.5% 50% 50% 5.0% 50% 4.5% 4.5% 50% 50% 4.0% 50% 3.5%