Consider a bond with a face value of ($ 1,000) and coupon payment at the end of
Question:
Consider a bond with a face value of \(\$ 1,000\) and coupon payment at the end of each period \(k\) given by a rate \(c_{k}=\max \left[6 \%-r_{k}, 0\right]\), where \(r_{k}\) is the short rate for period \(k\). This type of bond is called an inverse floater.
The one-period spot rate is currently \(4 \%\), and at each period it will either increase 1.5 times or remain constant. The risk-neutral probability implied by the current term structure is 0.5 . What is the price of an inverse floater maturing two periods from now? Note there are two coupon payments, with the first being paid one period from now.
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Question Posted: