Q4: What would be the price of a floating rate note with a coupon equal to the 1-year Treasury rate (with the coupon adjusted annually in arrears) that has a 5% cap? What is the value to the issuer of having the cap?

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%