Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three corporate bonds, as shown in Exhibit 1. EXHIBIT 1 Selected Bond Data Issuer Ayrault, Inc. (AI) Blum, Inc. (BI) Cresson Enterprises (CE) Coupon Rate 5.25% 5.25% 5.25% Price 100.200 EXHIBIT 2 Binomial Interest Rate Trees 101.300 102.100 Note: Each bond has a remaining maturity of three years, annual coupon payments, and a credit rating of BBB. 3.7000% To assess the interest rate risk of the three bonds, Bianchi constructs two binomial interest rate trees based on a 10% interest rate volatility assumption and a current one-year rate of 4%. Panel A of Exhibit 2 provides an interest rate tree assuming the benchmark yield curve shifts down by 30 bps, and Panel B provides an interest rate tree assuming the benchmark yield curve shifts up by 30 bps. Bianchi determines that the AI bond is currently trading at an option- adjusted spread (OAS) of 13.95 bps relative to the benchmark yield curve. Bond Description Callable at par in one year and two years from today Option-free Putable at par in one year from today A. Interest Rates Shift Down by 30 bps Year 0 Year 1 5.1968% 4.2548% Year 2 7.0037% 5.7342% 4.6947%