A bond with a face value of $1,000 and 5 years to maturity has an annual coupon
Question:
A bond with a face value of $1,000 and 5 years to maturity has an annual coupon rate of 12%. The bond cannot be called for the first 2 years (call protection), but can be called at a call price of $1,030 in year 3 or thereafter.
The appropriate annual discount rate for the bond is given by the following interest rate tree. The probability of an up-movement in the tree is equal to the probability of a down-movement, i.e., 50%.
# of downs Year 0 1 2 3 4
4 0.18 0.15 0.12 0.08 0.04
3 0.15 0.13 0.07 0.06
2 0.12 0.1 0.07
1 0.14 0.09
0 0.1
What is the value of the bond?
Fundamentals Of Financial Management
ISBN: 9781111795207
11th Edition
Authors: Richard Bulliet, Eugene F Brigham, Brigham/ Houston