Q2: What would be the price of a 4% annual coupon bond with 4 years to maturity that is callable at its $100 par value at any time starting 1 year from today? What is the value to the issuer of the option to call the bond?

The interest rate tree diagramed below pertains to the next four questions. You may assume that all of the bonds being valued in these questions are free of default risk. 2.52% 2.73% 2.02% 3.76% 4.08% 0.50% 5.60% 3.01% 6.08% 8.36% Year o Year 1 Year 2 Year 3 The tree assumes 20% annual interest rate volatility and is constructed from the following Treasury spot rates: Year 1: 0.50% Year 2: 1.50% Year 3: 2.40% Year 4: 3.00% The interest rate tree diagramed below pertains to the next four questions. You may assume that all of the bonds being valued in these questions are free of default risk. 2.52% 2.73% 2.02% 3.76% 4.08% 0.50% 5.60% 3.01% 6.08% 8.36% Year o Year 1 Year 2 Year 3 The tree assumes 20% annual interest rate volatility and is constructed from the following Treasury spot rates: Year 1: 0.50% Year 2: 1.50% Year 3: 2.40% Year 4: 3.00%