Suppose at time t = 0, you are given four default-free zero-coupon bond prices P(t, T) with
Question:
P(0, 1) = .94, P(0, 2) = .92, P(0, 3) = .87, P(0, 4) .80
(a) How can you “fit” a spot-rate tree to these bond prices? Discuss.
(b) Obtain a tree consistent with the term structure given above,
(c) What are the differences, if any, between the tree approaches in Questions (a) and (b)?
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Related Book For
An Introduction to the Mathematics of financial Derivatives
ISBN: 978-0123846822
2nd Edition
Authors: Salih N. Neftci
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