437%EXPLANATIONUPPER NODE INTEREST RATE = 6.25 × E = 437%2X0.15QUE...

8.437%

Explanation

Upper node interest rate = 6.25 × e

= 8.437%

2x0.15

Question #26 of 38

Question ID: 472600

Which of the following choices is least-likely a property of a binomial interest rate tree?

ᅚ

A)

Adjacent forward rates in a nodal period are one standard deviation apart.

Higher volatility at higher rates.

ᅞ

B)

ᅞ

C)

Non-negative interest rates.

A binomial interest rate tree has two desirable properties: non-negative interest rates and higher volatility at higher rates.

Additionally, adjacent forward rates in a nodal period are two standard deviations apart.

Question #27 of 38

Question ID: 472692

A 3-year, 3% annual pay, $100 par bond is valued using pathwise valuation. The interest rate paths are provided below:

Path

Year 1

Year 2

Year 3

1

2%

2.8050%

4.0787%

2

2%

2.8050%

3.0216%

3

2%

2.0780%

3.0216%

4

2%

2.0780%

2.2384%

The value of the bond in path 1 is closest to:

ᅞ

A)

$98.77

ᅚ

B)

$100.18

$101.88

Path 1 value =

Question #28 of 38

Question ID: 463782

A callable bond with an 8.2% annual coupon will mature in two years at par value. The current one-year spot rate is 7.9%. For the second

year, the yield-volatility model forecasts that the one-year rate will be either 6.8% or 7.6%. The call price is 101. Using a binomial interest

rate tree, what is the current price?