Question: Using a 50%; 50% probabilities binary-interest-rate-tree model, and the following assumptions, r0 = 22 4.000% rL = 5.500% rH = 6.718% volatility = 10% Calculate

Using a 50%; 50% probabilities binary-interest-rate-tree model, and the following assumptions,

r0 = 22

4.000% rL = 5.500% rH = 6.718% volatility = 10%

Calculate the price of the 2-year 5.7% option-free bond.

A. 102.80 B .99.24 C .101.09

D. 101.27

E. 101.03

Year 3 5.000% Year 1 4.000% 4.500% 5.000% 4.000% 4.000% Year 2 4.500% 104.500% 5.000% 4.511% 5.025% US Treasuries-Current YTM YTM->CashFlow3yr CF=>SpotRates SpotRates->FwdRates 105.000% 5.034% 6.088%

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