1. Verify the calculations of the zero coupon bond with interest rate uncertainty as discussed in class. ($100 face, 3-year, initial rate is 4%, +/- 50 basis points each year) 2. Value a coupon bond in the same uncertain interest rate environment. The coupon is 5% of the face value. Coupons are paid annually at the end of the year. What is the expected value of the bond? 3. What is the Annual Equivalent Rate on the bond? Be careful, your calculation must incorporate all the coupon payments. 4. Draw the binomial tree for a 3- year zero coupon bond (face value $100) in an environment where the interest rate is constant at 4%. However, there is a 1% probability of default each year with a recovery rate of 60% of face paid at the end of the year. In other words, each year there is a 1% chance the bond defaults, making a single payment of $60. No additional payments are made after default. What is the expected value of the bond? Remember to present value the default payment. 5. What is the annual equivalent yield on the bond with 1% default risk and 60% recovery. 1. Verify the calculations of the zero coupon bond with interest rate uncertainty as discussed in class. ($100 face, 3-year, initial rate is 4%, +/- 50 basis points each year) 2. Value a coupon bond in the same uncertain interest rate environment. The coupon is 5% of the face value. Coupons are paid annually at the end of the year. What is the expected value of the bond? 3. What is the Annual Equivalent Rate on the bond? Be careful, your calculation must incorporate all the coupon payments. 4. Draw the binomial tree for a 3- year zero coupon bond (face value $100) in an environment where the interest rate is constant at 4%. However, there is a 1% probability of default each year with a recovery rate of 60% of face paid at the end of the year. In other words, each year there is a 1% chance the bond defaults, making a single payment of $60. No additional payments are made after default. What is the expected value of the bond? Remember to present value the default payment. 5. What is the annual equivalent yield on the bond with 1% default risk and 60% recovery