Questions 1-6

Three-Year, 100 par, 3.00% Coupon, Annual Pay option-Free Bond XHIBIT Eurex NYSE Euronext Frankfurt 103.7956 103.7815 103.7565 Black shows Sun some exhibits that were part a recent presentation. Exhibit 3 presents f the data of a binomial lognormal interest rate tree fit to the yield curve shown in Ex hibit 2. Exhibit 4 presents most of the data of the implied values for a four-year, option-free bond with a 2.5% coupon based on the information in Exhibit 3 pay annual EXHIBIT 2 Yield to Maturity Par Rates for One-, Two-, and Three-Year Annual pay on Free Bonds wo-Year Three-Year One-Year 1.50% 1.70% 1.25% EXHIBIT 3 Binomial Interest Rate Tree Fit to the Yield Curve (Volatility 10%) Year 4 Year 1 Year 2 Year 3 Current 2.6241% Node 4-1 1.8229% 1.8280% 2500% 4.2009% Node 2-2 Node 3-2 1.4925% 3.4394% 1.7590% 1.2254% Node 3-4 2.8159% Node 4-5 Based on Exhibit 3 Year 4 Year 3 Year 2 Year 1 102.5000 102.3791 103.2695 03.4960 104.2876 102.5000 102.8442 104.0168 Node 1-2 102.5000 103.2282 104.6350 102.5000 103.5448 102.5000 ack about the missing data in Exhibits 3 and 4 and directs Sun to complete the owing tasks to those exhibits: Test that the binomial nterest tree has been properly calibrated to arbitrage-free. calculate pathwise valuations. To test the ac Develop a spreadsheet model to and calculate the value of curacy of the spreadsheet, use the data in Exhibit 3 second the bond if it takes a path of lowest rates in Year 1 and Year 2 and the Task 2 lowest rate in Year 3