Consider a 3 -year (10 %) coupon bond. The underlying short rate of interest follows a lattice
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Consider a 3 -year \(10 \%\) coupon bond. The underlying short rate of interest follows a lattice with initial value of \(R=1.15\) and then has an factor of 1.02 , a down factor of .99 , and risk-neutral probabilities of .5.
(a) Find the value of this bond with no risk of default.
(b) Given that the risk-neutral intensity is constant such that the default probability is . 9 each year, find the value of this bond.
(c) What is the spread between the two bonds?
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