Question: Construct a binomial interest rate tree to answer the following questions: Suppose one year forward rate at year 0 equals to 4.5749%, the lower one-year

Construct a binomial interest rate tree to answer the following questions: Suppose one year forward rate at year 0 equals to 4.5749%, the lower one-year forward rate at year 1 equals to 5.3210%, the higher one-year forward rate at year 1 is. . equals to 15%.

(a) Find the value of a 12% annual coupon bond with 2 years remaining until maturity. Assuming the bond is callable at $105 at year 1.

(b) What is the value of the embedded call option? Assuming the bond is callable at $105 at year 1.

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