A bond with a face value of $1,000 and 5 years to maturity has an annual coupon rate of 12%. The bond cannot be called for the first 2 years (call protection), but can be called at a call price of $1,030 in year 3 or thereafter. 

The appropriate annual discount rate for the bond is given by the following interest rate tree. The probability of an up-movement in the tree is equal to the probability of a down-movement, i.e., 50%.

# of downs Year     0            1           2               3             4

4                               0.18      0.15     0.12           0.08       0.04

3                               0.15      0.13     0.07           0.06

2                              0.12       0.1       0.07

1                              0.14      0.09

0                              0.1   

What is the value of the bond?

Answer rating: 100% (QA)

Answer To find the appropriate annual discount rate for the bond we need ... View the full answer