Use the following information to build the 3-year arbitrage-free binomial interest rate tree. All bonds are issued
Question:
Use the following information to build the 3-year arbitrage-free binomial interest rate tree.
All bonds are issued by US Treasury and will pay coupons annually.
Assume that future interest rates can realize either one of two possible forward rates, rH and rL and will evolve based on lognormal random walk with a volatility of 10%. (rH = rL*exp(2*10%))
Bond | M | N | O |
Issuer | US Treasury | US Treasury | US Treasury |
Face Value | 100 | 100 | 100 |
Coupon Rate | 3.0% | 3.0% | 3.0% |
Price | 100 | 100.200 | 100.400 |
Maturity | 1 year | 2 year | 3 year |
r1.L(lower of the two possible forward rates to be applied for a period of t=1 to t=2) is closet to:
r2.LL(lowest of the three possible forward rates to be applied for a period of t=2 to t=3) is closet to:
Based on the 3-year arbitrage-free binomial interest rate tree, the price of a 3-year 3% callable US treasury Bond P is closet to:
Consider the Bond P pays interest annually and an issuer can call the bond after paying annual coupons.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill