Given the following information: Current Interest Rate is 5% There are 3 different scenarios: Interest Rate can stay the same at 5% with probability 1/3 or increase to 6% with probability 1/3 or decrease to 4% with probability 1/3 Bond's information: Maturity is 8 years Coupon is 5%, paid annually Par value is $1,000 Call Price is $1,050

Questions:

If the bond can be called immediately, what is the price of the callable bond?

NOTICE: Round ALL calculations to 4 decimal places. Only round what you input in the blank to 2 decimal places. If you get 1.2345 then write 1.23.

GUIDE: Refer back to example 4 (Links to an external site.), 5 (Links to an external site.) if you are not sure what to do. Now try to fill out the intermediate steps (round to 4 decimal places):

Interest Rate	PV of Liability	"call" or "no call" ?	Price/Value in each case
5%
6%
4%

The price of the callable bond is $ (in 4 decimal places).

Now your final answer should be $ (in 2 decimal places).