The current on-the-run yields for the Ramsey Corporation are as follows:

b. Using the spot rates, what would be the value of an 8.5% option-free bond of this issuer?

c. Using the one-year forward rates, what would be the value of an 8.5% coupon option-free bond of this issuer?

d. Using the binomial model (which assumes that one-year rates undergo a lognormal random walk with volatility ), show that if is assumed to be 10%, the lower one-year forward rate one year from now cannot be 7%.

e. Demonstrate that if is assumed to be 10%, the lower one-year forward rate one year from now is 6.944%. Demonstrate that if o is assumed to be 10%, the lower one-year forward rate two years from now is approximately 6.437%. g. Show the binomial interest-rate tree that should be used to value any bond of this issuer. h. Determine the value of an 8.5% coupon option-free bond for this issuer using the binomial interest-rate tree given in part g. i. Determine the value of an 8.5% coupon bond that is callable at par (100) assum- ing that the issue will be called if the price exceeds par.AppendixLO1

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Maturity (years) Yield to Maturity (%) Market Price 23 1 2 7.5 100 7.6 100 7.7 100 Assume that each bond is an annual-pay bond. Each bond is trading at par, so its coupon rate is equal to its yield to maturity. a. Using the bootstrapping methodology, complete the following table: Year 1 Spot One-Year Rate (%) Forward Rate (%) 3 23