1. Consider a 3-year, 4.5% annual coupon bond represented by the binomial interest rate tree on...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. Consider a 3-year, 4.5% annual coupon bond represented by the binomial interest rate tree on the following page. The bond is callable at par starting at the end of year 1. The one-year benchmark implied forward rates are provided for one node of each year of the bond. The bond's OAS is 35 basis points. Assume that the interest rate volatility = 15%. Please complete the tree, filling in the interest rates and the value of the bond at each node (wherever a "????" occurs, fill in an answer). Remember to adjust the benchmark rates with the OAS after all of the benchmark rates in the tree have been determined. Note that each node except the one at time=0 represents the payment of a 4.5% coupon, so be sure to include that in the valuation. Show your supporting work in the space below. 1. V=100 C=4.5 V = ???? i = 3.0000% VH=???? C=4.5 H ???? V = ???? C=4.5 i1,L=3.5000% V2HH ???? C=4.5 12,HH ???? V2HL=???? C=4.5 V 100 C=4.5 2,HL = ???? V=100 C=4.5 V2LL=???? C=4.5 2.LL -4.1000% V = 100 C=4.5 Time = 0 Time = 1 Time=2 Time=3 1. Consider a 3-year, 4.5% annual coupon bond represented by the binomial interest rate tree on the following page. The bond is callable at par starting at the end of year 1. The one-year benchmark implied forward rates are provided for one node of each year of the bond. The bond's OAS is 35 basis points. Assume that the interest rate volatility = 15%. Please complete the tree, filling in the interest rates and the value of the bond at each node (wherever a "????" occurs, fill in an answer). Remember to adjust the benchmark rates with the OAS after all of the benchmark rates in the tree have been determined. Note that each node except the one at time=0 represents the payment of a 4.5% coupon, so be sure to include that in the valuation. Show your supporting work in the space below. 1. V=100 C=4.5 V = ???? i = 3.0000% VH=???? C=4.5 H ???? V = ???? C=4.5 i1,L=3.5000% V2HH ???? C=4.5 12,HH ???? V2HL=???? C=4.5 V 100 C=4.5 2,HL = ???? V=100 C=4.5 V2LL=???? C=4.5 2.LL -4.1000% V = 100 C=4.5 Time = 0 Time = 1 Time=2 Time=3
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
Uniform rod AB of length l and mass m lies in a vertical plane and is acted upon by a couple M. The ends of the rod are connected to small rollers which rest against frictionless surfaces. (a)...
-
From the following data, calculate the Retained Earnings balance as of December 31, 2011: Retained earnings, December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....
-
Polly's Pet Store has a local monopoly on the grooming of dogs. The daily inverse demand curve for pet grooming is: P = 20 - 0.1Q where P is the price of each grooming and Q is the number of...
-
What are two ways of expressing the rate of return on investment?
-
The manager of The Cheesecake Factory in Boston reports that on six randomly selected weekdays, the number of customers served was 120, 130, 100, 205, 185, and 220. She believes that the number of...
-
uick LTD, residente en los Estados Unidos, percibe ingresos de Mxico, por un importe de $7'500,000.00 MXN y paga impuestos por $675,000.00 MXN de los cuales paga dividendos a MexCo., S.A. de C.V....
-
Please prepare a statement of cash flows (indirect method) for the accounting period of 2018 (1st of January 2018 31st of December 2018), using the templates provided. BACCIS BAKERY Notes of the...
-
Mackenzie Mining has two operating divisions, Northern and Southern, that share the common costs of the company's human resources (HR) department. The annual costs of the HR department total...
-
(b) The following investment options are being undertaken by MGMT2023 Economic State Probability Return Fast Growth 15x 50% Slow Growth 20x 12% Recession 10 x -10% Depression 15 -35% Determine: (a)...
-
AirQual Test Corporation provides on-site air quality testing services. The company has provided the following cost formulas and actual results for the month of February: Revenue Technician wages...
-
The level of technology and innovation in developing countries is lagging behind that of developed countries. Discuss clearly why this is so. As chief economist of your government, discuss how you...
-
The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $47 million and having a four-year expected life, after which the assets can be...
-
Dudley Transport Company divides its operations into four divisions. A recent income statement for its West Division follows. DUDLEY TRANSPORT COMPANY West Division Income Statement for Year 3...
-
Ashlee, Hiroki, Kate, and Albee LLC each own a 25 percent interest in Tally Industries LLC, which generates annual gross receipts of over $10 million. Ashlee, Hiroki, and Kate manage the business,...
-
If the government taxed a manufacturer by the amount of those external costs it imposes on others, it would force the manufacturer to _________ the costs.
-
Unlike the consumption of private goods, the consumption of public goods is both _________ and _________.
-
In the case of either external benefits or external costs, buyers and sellers are receiving the wrong signals: The apparent benefits or costs of some actions differ from the _________ benefits or...
Study smarter with the SolutionInn App