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You have built the following interest rate tree for the next 2 years: Time 0 (%) Time 1 (%) i2h = 3.05 i1 = 2.61

You have built the following interest rate tree for the next 2 years:

Time 0 (%) Time 1 (%)
i2h = 3.05
i1 = 2.61
i2l = 1.55

1) What is the value of the embedded call option in a default-free 3.63% 2-year bond which is callable at par in 1 year, based on this information?

2) What would be the implied price of a default-free 1.11% 2-year bond which is putable at par in 1 year, based on this information?

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