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1) Let the six-month interest rate be 5% and assume term rates increase by 25 bp for each additional six months (e.g. the one year
1) Let the six-month interest rate be 5% and assume term rates increase by 25 bp for each additional six months (e.g. the one year rate is 5.25%...). Assume the six month forward rate can move up or down by 25 bp each six-month period with equal probability. Build an interest rate tree to value a two-year, 6% callable bond that can only be called every six-months for par ($100). What is the value of the embedded option
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