Problem B Company ABC has issued a note with a coupon rate of 6 percent and a term of 3 years. With respect to the newly issued note, assume interest is payable annually and that the entire principal balance is payable on the maturity date. The following table shows the term structure of Company ABCs debt yields: 1. Prepare a discounted cash flow (DCF) model (in Excel) to value the notes as of the issuance date based on the terms described above for $25,000 principal of notes. You need to show the principal and interest cashflows for each annual period. 2. What is the yield to maturity of the notes as of the issuance date? 3. Now consider the possibility that the notes are prepayable by the issuer (also called "callable" or "redeemable"). This means that the borrowing Company could repay the notes earlier than the stated maturity date. Use $25,000 as principal at issuance date for any calculations below. a. Discuss the benefits and drawbacks of issuing a note that is callable from the perspective of both the issuer and the investor. b. Without any calculations, all else being equal, would the value of the callable notes be higher or lower than the value calculated in question 1 ? c. 1 year after issuance, right after the first coupon payment, assume the yield to maturity of the notes is now 5.5%. Similar to question 1 , calculate the value of the notes, assuming they are not callable. d. 1 year after issuance, consider the following short-term interest rate tree. The rates on the tree correspond to the future possible evolution of the 1-year yield for the company. Each up/down move has equal probability. For example, a year from the measurement date, the 1-year yield will be either 7.50% or 3.78% with 50/50 probability, and cashflow of $100, due 1 year from the measurement date, would have a value of $100/(1+5.40%) as of the measurement date. Time (in years) 1 (issuance date) i. Estimate the value of the notes, assuming they are not callable, using backward induction on the interest rate tree. Compare your value to the answer in question 3c. ii. For callable notes, at each point in time, the issuer will minimize value to the investor by deciding whether to prepay or not the notes. In the context of the tree, the optimal decision behavior is modeled at each node. Estimate the value of the callable notes (callable at 100% of par at any time) using backward induction on the interest rate tree