F. A collared floater is like a variable rate bond, but with an upper limit and a lower limit on the rate of coupon payment. Consider, for example, annual rates coupon payment and one-year spot interest rates. In the following table, the current one-year spot interest rate is denoted by r in column (1). Depending on the current spot interest rate, the collared floater with a face value of 325 dollars will pay the holder of this floater a sum a year later, as given in column (2) of the table. The binomial tree below gives the evolution of one-year spot interest rates over a four year period.

22. What is the current fair value of the four-year collared floater if the risk-neutral probabilities in the binomial tree are 0.5 and 0.5 for the up and down moves, respectively?

F1 = 325

F2 = 16.25

F3 = 26

Current Rate, r Collared Floater with face value Fl pays at the end of the year F2 F1xr% F3 590 r 8% r > 8% 10.50% 8.75% 6.2% 9.50% 4.5% 6,00% 5.2% 6.25% 5.50% 4.75% Current Rate, r Collared Floater with face value Fl pays at the end of the year F2 F1xr% F3 590 r 8% r > 8% 10.50% 8.75% 6.2% 9.50% 4.5% 6,00% 5.2% 6.25% 5.50% 4.75%