On 1 October 2015, you are reviewing two fixed-rate bonds issued by a local firm, the two bonds, whose characteristics are given in the table below: (25 marks)

Bond	Maturity	Coupon	Type of Bond
Bond A	1 October 2018	5.5% annual	Callable at par on 1 October 2016 and on 1 October 2017
Bond B	1 October 2018	5.5% annual	Putable at par on 1 October 2016 and on 1 October 2017

Based on an estimated interest rate volatility of 10%, you constructed the binomial annual interest rate tree shown below.

0.035	0.04815	0.06142
	0.03942	0.05029
		0.04117

1) Calculate the value of Bond A and Bond B.

2) Which bond would most likely protect investors against a significant increase in interest rates?

3) All else being equal if you assume an interest rate volatility of 15% instead of 10%, the bond that would most likely increase in value is: