*Answers for parts D & E needed only!

The current on-the-run yields for the Ramsey Corporation are as follows: Maturity (years) Yield to Maturity (%) Market Value 1 7.5 100 2 7.6 100 3 7.7 100 Assume that each bond is an annual-pay bond. Each bond is trading at par, so its coupon rate is equal to its yield to maturity. (a) Using the bootstrapping methodology, complete the following table: Year Spot Rate (%) One-Year Forward Rate (%) 1 2 3 (b) Using the spot rates, what would be the value of an 8.5% option-free bond of this issuer? (c) Using the one-year forward rates, what would be the value of an 8.5% coupon option-free bond of this issuer? (d) Using the binomial model (which assumes that one-year rates undergo a lognormal random walk with volatility s), show that if s is assumed to be 10%, the lower one-year forward rate one year from now for two-year 7.6% bond traded in par cannot be 7%. (e) Determine the value of an 8.5% coupon bond that is callable at par (100) assuming that the issue will be called if the price exceeds par