Suppose that Treasury bond rates are currently 10% but will change tomorrow to be 6% or 14%: each outcome is equally likely. After the rate change, rates are expected to remain at either 6% or 14% permanently. Let us consider a 20-year 10% callable bond with the strike price of $105 and the call protection period of 5 years. The market price of the callable bond is $93.20. Assume annual compounding. there are abc,3 sub questions. please show the intermediate steps in details. thx so much!

\#2. Suppose that Treasury bond rates are currently 10% but will change tomorrow to be 6% or 14% : each outcome is equally likely. After the rate change, rates are expected to remain at either 6% or 14% permanently. Let us consider a 20 -year 10% callable bond with the strike price of $105 and the call protection period of 5 years. The market price of the callable bond is $93.20. Assume annual compounding. (a) What is the fair value of the callable bond without any consideration of credit risk? (b) What is the yield spread between the callable bond and a 20-year 10% straight bond? (c) What is the OAS on the callable bond? (1) 0.4% (2) 0.6% (3) 0.8%