Given the following information on a three year callable and puttable bond: Set up the decision tree first. The Time to Maturity is 3 years and coupon rate is 4.5%. Year 0 5.5%. Year 1. HH 6.5% LL 5.2%. Year 2 HH 6.9%. HL 5.6% LL 4.9%

1. Show all work and label the values in each node of the decision tree.

2. Calculate the bond prices at each of the nodes all the way to year 0, backwards induction. Do this for both callable and puttable.

3. Briefly discuss your results.