Consider a 3 -year (10 %) coupon bond. The underlying short rate of interest follows a lattice

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Consider a 3 -year $10 \%$ coupon bond. The underlying short rate of interest follows a lattice with initial value of $R=1.15$ and then has an factor of 1.02 , a down factor of .99 , and risk-neutral probabilities of .5.

(a) Find the value of this bond with no risk of default.

(b) Given that the risk-neutral intensity is constant such that the default probability is . 9 each year, find the value of this bond.

(c) What is the spread between the two bonds?

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Investment Science

ISBN: 9780199740086

2nd Edition

Authors: David G. Luenberger

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Question Posted: Apr 20, 2024 12:12 PM

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Consider a 3 -year (10 %) coupon bond. The underlying short rate of interest follows a lattice

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Investment Science

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