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You are interested in valuing several bonds. The binomial interest rate tree that describes the evolution of the one-year interest rate in different interest rate
You are interested in valuing several bonds. The binomial interest rate tree that describes the evolution of the one-year interest rate in different interest rate states is presented in the following table. Year 0 Year 1 Year 2 Year 3 3.5% 5.429% (h) 17.025% (hh) 9.199% (hhh) 4.445% (1) 5.735% (hl) 7.531% (hhl) 6.166% (hll) 4.696% (11) 5.048% (111) The annual spot rates for different maturities are presented in the following table. 1 Year 2 Years 3 Years 4 Years 3.5% 4.2147% 4.7345% 5.2707% Assume that the par value is $100 and all bonds pay coupon annually. The risk-neutral probability is 50% on each leg. c. What is the value of the put option embedded in the above putable bond? Retain accuracy to 3 decimal places. You are interested in valuing several bonds. The binomial interest rate tree that describes the evolution of the one-year interest rate in different interest rate states is presented in the following table. Year 0 Year 1 Year 2 Year 3 3.5% 5.429% (h) 17.025% (hh) 9.199% (hhh) 4.445% (1) 5.735% (hl) 7.531% (hhl) 6.166% (hll) 4.696% (11) 5.048% (111) The annual spot rates for different maturities are presented in the following table. 1 Year 2 Years 3 Years 4 Years 3.5% 4.2147% 4.7345% 5.2707% Assume that the par value is $100 and all bonds pay coupon annually. The risk-neutral probability is 50% on each leg. c. What is the value of the put option embedded in the above putable bond? Retain accuracy to 3 decimal places
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