# 4 Suppose that Treasury bond rates are currently 10% but will change tomorrow to be 6%/6 or 14% : each outcome is equally likely . After the rate change , rates are* expected to remain at either 6%/6 or 14%/ permanently . Let us consider a 20 - year 10% callable bond with the strike price of $105 and the call protection period of 5 years . The market price of the callable bond is $93 . 20 . Assume annual compounding . What is the fair value of the callable bond without any consideration of credit risk ? What is the yield spread between the callable bond and a 20 - year 10% straight bond