Question: 5. (16 pts) Consider a default-free bond that has three years to maturity, annual coupons of 4.65%, and is callable at par one year and

5. (16 pts) Consider a default-free bond that has three years

5. (16 pts) Consider a default-free bond that has three years to maturity, annual coupons of 4.65%, and is callable at par one year and two years from today. a) Using the binomial interest rate tree below, compute the value of the callable bond. b) What is the volatility implicit in the tree? c) If a risky bond with the same coupons and callability has an OAS of 55 basis points, what is its price? Year 0 Year 1 Year 2 7.4832% 5.7678% 4.4000% 5.5437% 4.2729% 4.1069%

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