Exhibit 4 presents the bonds characteristics for both bonds you need to price using the tree in Exhibit 3

Using the binomial interest rate tree in Exhibit 3, you create possible interest rate paths for Bond D shown in Exhibit 7.

Based on Exhibits 4 and 7, the present value of Bond Ds cash flows following Path 2 is closest to:

105.8607

102.8607

97.0322

\begin{tabular}{ccc} Exhlbit 3 & Binomlal Interest Rate Tree with Volatillty =25% \\ \hline Time 0 & Time 1 & Time 2 \\ \hline & & 2.7183% \\ & 2.8853% & 1.6487% \\ 1.500% & 1.7500% & 1.0000% \\ \hline \end{tabular} \begin{tabular}{lcc} \hline Exhlbit 4 & Selected Data on Annual Pay Bonds \\ \hline Bond & Maturity & Coupon Rate \\ \hline Bond C & 2 years & 2.5% \\ Bond D & 3 years & 3.0% \\ \hline \end{tabular} Exhibit 7 Interest Rate Paths for Bond D \begin{tabular}{llll} Path & Time 0 & Time 1 & Time 2 \\ \hline 1 & 1.500% & 2.8853% & 2.7183% \\ 2 & 1.5019 & 28553 & 1.6487 \\ 3 & 1.500 & 1.7500 & 1.6187 \\ 4 & 1.500 & 1.7500 & 1.0000 \\ \hline \end{tabular} \begin{tabular}{ccc} Exhlbit 3 & Binomlal Interest Rate Tree with Volatillty =25% \\ \hline Time 0 & Time 1 & Time 2 \\ \hline & & 2.7183% \\ & 2.8853% & 1.6487% \\ 1.500% & 1.7500% & 1.0000% \\ \hline \end{tabular} \begin{tabular}{lcc} \hline Exhlbit 4 & Selected Data on Annual Pay Bonds \\ \hline Bond & Maturity & Coupon Rate \\ \hline Bond C & 2 years & 2.5% \\ Bond D & 3 years & 3.0% \\ \hline \end{tabular} Exhibit 7 Interest Rate Paths for Bond D \begin{tabular}{llll} Path & Time 0 & Time 1 & Time 2 \\ \hline 1 & 1.500% & 2.8853% & 2.7183% \\ 2 & 1.5019 & 28553 & 1.6487 \\ 3 & 1.500 & 1.7500 & 1.6187 \\ 4 & 1.500 & 1.7500 & 1.0000 \\ \hline \end{tabular}