Paperia Company issued at par two 5-year floating rate notes C and F. The additional credit...

 

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Paperia Company issued at par two 5-year floating rate notes C and F. The additional credit spread (OAS) to add to Libor is +200 bps. Floating coupon is Libor + 2%. The coupons are as normal, paid in arrears. C is capped at 6%. F is floored at 4.5%. After 2 years, the bonds have 3 years left before maturity. The BDT binomial 1-period Libor rate tree is as follows. (a) What is the arbitrage-free price of C? (b) What is the arbitrage-free price of F? (c) What are estimates of the effective durations of C and F? t=0 t=1 t=2 t=3 0.041723 0.03 0.034428 0.025 0.030297 0.022 Paperia Company issued at par two 5-year floating rate notes C and F. The additional credit spread (OAS) to add to Libor is +200 bps. Floating coupon is Libor + 2%. The coupons are as normal, paid in arrears. C is capped at 6%. F is floored at 4.5%. After 2 years, the bonds have 3 years left before maturity. The BDT binomial 1-period Libor rate tree is as follows. (a) What is the arbitrage-free price of C? (b) What is the arbitrage-free price of F? (c) What are estimates of the effective durations of C and F? t=0 t=1 t=2 t=3 0.041723 0.03 0.034428 0.025 0.030297 0.022

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