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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