23%CORRESPONDING PART OF NON-CALLABLE BOND TREE

7.23%

Corresponding part of non-callable bond tree:

$92.38

A → −

$96.83

The value of the bond at node A is closest to:

ᅞ A)

$90.56.

ᅚ B)

$94.01.

$97.02.

ᅞ C)

Explanation

This value of the non-callable bond at node A is computed as follows:

Bond Value = {0.5 × [Bond Value + (Coupon / 2)]} + {0.5 × [Bond Value + (Coupon / 2)]} / (1 + Interest Rate / 2)

Bond Value at node A = {0.5 × [$92.38 + ($6.25 / 2)]} + {0.5 × [$96.83 + ($6.25 / 2)]} / [1 + (7.91% / 2)] = $94.01 (Study Session 14, LOS