13. The current on-the-run yields for theKathyCorporation are as follows:

Maturity (years)	Yield to Maturity (%)	Market Value
1	7.5	100
2	8	100
3	8.5	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.

Answer the below questions.

(a) Using the bootstrapping methodology, complete the following table:

Year	Spot Rate (%)	One-Year Forward Rate (%)
1
2
3

(b) Using the spot rates, what would be the value of a 3-year 9% coupon option-free bond of this issuer?

(c) Using the binomial model (which assumes that one-year rates undergo a lognormal random walk with volatilitys), show that ifs is assumed to be 15%, is it correct that the lower one-year forward rate one year from now equal to7.5%.

(d) Demonstrate that if is assumed to be 15%, using Excel solver to solve how much is the lower one-year forward rateone year from now. Pls draw a binomial model and put the value on each of the node.

(e) Demonstrate that if is assumed to be 15%, using Excel solver to solve how much is the lower one-year forward ratetwo years from now. Pls draw a binomial model and put the value on each of the node.

(f) Determine the value of a 3-year,10% coupon bond that is callable at par (100) assuming that the issue will be called if the price exceeds par.

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