Question 3. A. Find the price of a 4-year 6% annual coupon bond that is callable in Year 2 and 3 with a strike of $100.00. The par value is $100. Use the forward rate tree provided below: [6 marks) Today Year 1 Year 2 Year 3 4.0% 4.0% 4.0% 6.0% 4.0% 6.0% 6.0% 8.0% 8.0% 12.0% B. Which bond would have higher duration: the callable bond above or a vanilla bond that is otherwise identical to the callable bond above? Briefly explain why. [4 marks] M M Question 3. A. Find the price of a 4-year 6% annual coupon bond that is callable in Year 2 and 3 with a strike of $100.00. The par value is $100. Use the forward rate tree provided below: [6 marks) Today Year 1 Year 2 Year 3 4.0% 4.0% 4.0% 6.0% 4.0% 6.0% 6.0% 8.0% 8.0% 12.0% B. Which bond would have higher duration: the callable bond above or a vanilla bond that is otherwise identical to the callable bond above? Briefly explain why. [4 marks] M M