Question
Use the following information to build the 3-year arbitrage-free binomial interest rate tree. All bonds are issued by US Treasury and will pay coupons annually.
Use the following information to build the 3-year arbitrage-free binomial interest rate tree.
All bonds are issued by US Treasury and will pay coupons annually.
Assume that future interest rates can realize either one of two possible forward rates, rH and rL and will evolve based on lognormal random walk with a volatility of 10%. (rH = rL*exp(2*10%))
Bond | M | N | O |
Issuer | US Treasury | US Treasury | US Treasury |
Face Value | 100 | 100 | 100 |
Coupon Rate | 3.0% | 3.0% | 3.0% |
Price | 100 | 100.200 | 100.400 |
Maturity | 1 year | 2 year | 3 year |
r1.L(lower of the two possible forward rates to be applied for a period of t=1 to t=2) is closet to:
Group of answer choices
2.257%
2.452%
2.511%
2.623%
r2.LL(lowest of the three possible forward rates to be applied for a period of t=2 to t=3) is closet to:
Group of answer choices
2.257%
2.452%
2.511%
2.623%
Based on the 3-year arbitrage-free binomial interest rate tree, the price of a 3-year 3% callable US treasury Bond P is closet to: Consider the Bond P pays interest annually and an issuer can call the bond after paying annual coupons.
Group of answer choices
98.885
99.885
100.885
101.885
Based on your answer to Question 19, the value of call option embedded to the 3-year 3% callable Bond P is closet to:
Group of answer choices
1.515
0.515
-0.485
-1.485
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started