LV=[(100.558+8.2)/1.079)+(101+8.2)/1.079)]/2 = 101.000.0QUESTION #29...

1,L

V

=[(100.558+8.2)/1.079)+(101+8.2)/1.079)]/2 = 101.000.

0

Question #29 of 38

Question ID: 463769

For a putable bond, callable bond, or putable/callable bond, the nodal-decision process within the backward induction methodology of the

interest rate tree framework requires that at each node the possible values will:

ᅚ

A)

not be higher than the call price or lower than the put price.

ᅞ

B)

include the face value of the bond.

ᅞ

C)

be, in number, two plus the number of embedded options.

Explanation

At each node, there will only be two values. At each node, the analyst must determine if the initially calculated values will be below the

put price or above the call price. If a calculated value falls below the put price: V

= the put price. Likewise, if a calculated value falls

i,U

above the call price, then V

= the call price. Thus the put and call price are lower and upper limits, respectively, of the bond's value at a

i,L

node.

Question #30 of 38

Question ID: 463767

Using the following interest rate tree of semiannual interest rates what is the value of an option free bond that has one year

remaining to maturity and has 5% coupon rate with semi-annual coupon payments.

Today

6 Months