1 The Two Year Binomial Interest Rate Tree With One Year Rates Is Given Below The Volatility Of The One Year Rate Is O 1 (29.07 KiB) Viewed 28 times
Is the price of this callable bond lower or higher than an
otherwise comparable non-callable bond? And why? (10 MARKS)
1. The two-year binomial interest-rate tree with one-year rates is given below. The volatility of the one-year rate is o = 10%. Calculate the price of a callable bond with three years to maturity, a coupon rate of 2.5%, par value of $100, and callable in two years at $100. Coupons are paid annually. r2.HH 2.67% r1.H = 2.52% = 2.43% ro 2.HL = 2.19% 11,1 = 2.06% 12,LL = 1.79%
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