1. What is the value of a bond that matures in exactly 2 years, has par value of $100, an annual coupon of 4.4%, and is not callable?

2. What is the value of a bond identical that of Problem #1 but is callable in 1 year at a price of 101?

3. Relative to your answer in #2, what would happen to the price of the bond if it was callable at par?

a. Price would not change

b. Price would increase

c. Price would decrease

4. Relative to your answer in #2, what would happen if the future interest rate volatility was 5% rather than 10%?

a. Price would not change

b. Price would increase

c. Price would decrease

5. What would happen to the duration of the bond in Ex. 2 if interest rates decrease.

a. Duration would go up

b. Duration would fall

c. Duration would not change

1. You observe the following set of spot rates: Time Period Oyly Oy2y Oy3y Rate 2.25% 2.75% 3.10% You also estimate that future interest rate volatility is 10%, which leads to the following binomial interest rate tree: 4.647% 3.5930% 2.25% 3.8046 2.9417% 3.115% 1. You observe the following set of spot rates: Time Period Oyly Oy2y Oy3y Rate 2.25% 2.75% 3.10% You also estimate that future interest rate volatility is 10%, which leads to the following binomial interest rate tree: 4.647% 3.5930% 2.25% 3.8046 2.9417% 3.115%