ESPN: The Worldwide Lead rik Help Ask A Q kboard Leal Microsoft Word HW 5 Fin4014. Google https://canopy.uc.edu/bbcswebdav/pid-7436380-dt-content-rid-27825648 courses/14FS FIN4014001/HW 5 Fin4014.pdf Page: 2 of 2 110% 2. Black, Derman, and Toy binomial short-term interest rate model In the Black, Derman, and Toy model, the binomial tree of the 6-month short-term interest rate is in the table below. Each period represents a six-month time interval. From each node, the 6- month short-term interest rate goes up in the next period with 50% probability and goes down with 50% probability r3e r2e rie r3e ro rze rre r2 r3 2a. The current spot rate curve is in the table below, which is identical to that in the previous question. Assume o is 10%. Find the values for ri, r2, and r3 so that the binomial tree model price the 12-month, 18-month, and 24-month zero-coupon bonds correctly period Years Annualized Spot Rate 0.5 6.0000% 6.1496% 6.2654% 1.5 6.4227% 2b. Use the binomial tree model that you developed in 2a to price a 2-year 8% coupon bond with the par value of S1000. 2c. Suppose the bond in 2b is callable at the price of S1000 in 6 months, 12 months, and 18 months. Price the callable bond. Does the callable bond have a higher or lower price than the bond in 2b and why? 2d. Suppose the bond in 2b is puttable at the price of $1000 in 6 months, 12 months, and 18 months. Price the callable bond. Does the puttable bond have a higher or lower price than the bond in 2b and why? ESPN: The Worldwide Lead rik Help Ask A Q kboard Leal Microsoft Word HW 5 Fin4014. Google https://canopy.uc.edu/bbcswebdav/pid-7436380-dt-content-rid-27825648 courses/14FS FIN4014001/HW 5 Fin4014.pdf Page: 2 of 2 110% 2. Black, Derman, and Toy binomial short-term interest rate model In the Black, Derman, and Toy model, the binomial tree of the 6-month short-term interest rate is in the table below. Each period represents a six-month time interval. From each node, the 6- month short-term interest rate goes up in the next period with 50% probability and goes down with 50% probability r3e r2e rie r3e ro rze rre r2 r3 2a. The current spot rate curve is in the table below, which is identical to that in the previous question. Assume o is 10%. Find the values for ri, r2, and r3 so that the binomial tree model price the 12-month, 18-month, and 24-month zero-coupon bonds correctly period Years Annualized Spot Rate 0.5 6.0000% 6.1496% 6.2654% 1.5 6.4227% 2b. Use the binomial tree model that you developed in 2a to price a 2-year 8% coupon bond with the par value of S1000. 2c. Suppose the bond in 2b is callable at the price of S1000 in 6 months, 12 months, and 18 months. Price the callable bond. Does the callable bond have a higher or lower price than the bond in 2b and why? 2d. Suppose the bond in 2b is puttable at the price of $1000 in 6 months, 12 months, and 18 months. Price the callable bond. Does the puttable bond have a higher or lower price than the bond in 2b and why
