A bond with 3 years to maturity is callable at 10 200 ex-coupon on the payment days. The par value is 10 000 and the bond pays annual 5% coupon. Current market yields are 4% and the research department developed the following scenarios for the interest rate movements:

Both upward and downward movement have the same probability p=0,5

a) Calculate the present value of the callable bond.

b) What is the value of the call option on that bond if the straight bond value is 10325.48

Now In a year In 2 years 5% 5% 4% 4% 3% 3% 2%