Question
Suppose that we have a 3-year 3.25% annual coupon bond with a Bermudan-style put option. The investors can put back the bond at par one
Suppose that we have a 3-year 3.25% annual coupon bond with a Bermudan-style put option. The investors can put back the bond at par one year and two years from now. Par value is 100.
The following table provides equivalent forms of a yield curve with maturities of one, two, and three years. Assume annual compounding.
What is the price of the put option?
Round your answer to 2 decimal places. For example, if your answer is 25.689, please write down 25.69.
Maturity (year) | One-year Forward Rate (%) |
1 | 0-year from now: 2.5 |
2 | 1-year from now: 3.518 |
3 | 2-year from now: 4.564 |
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