What are the 1-, 2-, 3-, 4-, and 5-year zero-coupon bond prices implied by the two trees?
Answer to relevant QuestionsWhat volatilities were used to construct each tree? (You computed zero-coupon bond prices in the previous problem; now you have to compute the year-1 yield volatility for 1-, 2-, 3-, and 4-year bonds.) Can you unambiguously ...Repeat the previous problem, but set φ = 0.05. Be sure that you simulate the riskneutral process, obtained by including the risk premium in the interest rate process. Consider two zero-coupon bonds with 2 years and 10 years to maturity. Let a = 0.2, b = 0.1, r = 0.05, σVasicek = 10%, and σCIR = 44.721%. The interest rate risk premium is zero in each case. We will consider a position ...Using the same assumptions as in Problem 26.12, compute the 10-day 95% VaR for a claim that pays $3m each year in years 7–10. In Problem 26.12 Suppose the 7-year zero-coupon bond has a yield of 6% and yield volatility of ...The firm has a single outstanding debt issue with a promised maturity payment of $120 in 5 years. What is the probability of bankruptcy? What is the credit spread?
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