The assignment is about valuing bonds in an environment of uncertain interest rates. - The interest rate for the first year is 4% (no uncertainty). - Each year the one-year interest rate could move up or down by 1%. - The likelihood that the rate moves higher is 70%; the rate that it moves lower is 30%. Note the probability differs from the lecture examples. - All bonds have a face value of $1,000. We will complete the following table by answering the following nine questions. Some of the cells are already complete so that you can verify your calculations against mine. Consider a one-year zero-coupon bond. The simple calculation can be done on a calculator or with Excel. Round your final answer as in the table above; do not round intermediate values. 7. Use the discount factors to value a four-year coupon bond (face value of $1,000 and a coupon rate of 5% ). You do not need to use the binomial tree, but you can verify your calculation using the tree if you are unsure of the answer. 8. Calculate the yield on the four-year coupon bond using your answer to question 7. I suggest using the IRR function in Excel. 9. The airline industry is currently considered very risky. I just paid $900 for a one-year zerocoupon airline bond with a face value of $1,000. What default rate does the price imply? Be specific about your assumption on recovery and whether you are using an approximation or an exact formula. 10. Some fixed income instruments, mortgages are an example, have constant cash flow. What would be the price or value of a security paying $25,000 per year for four years in the uncertain interest rate environment described above