This problem has been solved!

Do you need an answer to a question different from the above? Ask your question!

# The on-the-run issue for ABC Company is shown below: Maturity 123 Yield to maturity Market price 7.50% 100 7.60% 100 7.70% 100 Using the bootstrapping methodology, the spot rates are: Spot rate Maturity 7.50% 1 2 3 Assuming an

**Transcribed Image Text:**

## The on-the-run issue for ABC Company is shown below: Maturity 123 Yield to maturity Market price 7.50% 100 7.60% 100 7.70% 100 Using the bootstrapping methodology, the spot rates are: Spot rate Maturity 7.50% 1 2 3 Assuming an interest rate volatility of 10% for the 1-year rate, the binomial interest rate tree for valuing a bond with maturity of up to three years is shown below: 8.481% 7.50% 7.604% 7.71% 6.944% 9.603% 7.862% 6.437% I a) Demonstrate using the 3-year on-the-run issue that the binomial interest rate tree above is in fact an arbitrage free tree. b) Consider a 2-year on-the-run issue, demonstrate that the binomial interest rate tree above is also an arbitrage free tree c) Using the spot rate given above, what is the arbitrage-free value of a 3-year 8.5% coupon issue of ABC Company d) Using the binomial tree, determine the value of an 8.5% 3-year option free- bond e) Suppose that the 3-year 8.5% is callable starting in year 1 at par (100). What is the value of this 3-year 8.5% coupon callable bond? f) What is the value of embedded call option for the 3-year 8.5 % callable issue?

- Expert Answer

**Related Book For**

Post a Question and Get Help

Cannot find your solution?

Post a FREE question now and get an answer within minutes*.

*Average response time.

### Related Video

The yield to maturity (YTM) is the percentage rate of return for a bond assuming that the investor holds the asset until its maturity date. This video will give a complete tutorial on how to calculate Yield to Maturity on Microsoft Excel