00AS AN EXAMPLE, THE PRICE AT NODE A IS OBTAINED AS FOLLOWS

100.00

As an example, the price at node A is obtained as follows:

Price

= (prob × (P

+ (coupon / 2)) + prob × (P

+ (coupon / 2)) / (1 + (rate / 2)) = (0.5 × (100 + 2.5) + 0.5 × (100 + 2.5) / (1 + (0.0730

A

up

down

/ 2)) = 98.89. The bond values at the other nodes are obtained in the same way.

The calculation for node 0 or time 0 is

0.5[(98.89 + 2.5) / (1+ 0.062 / 2) + (99.56 + 2.5) / (1 + 0.062 / 2)] =

0.5(98.3414 + 98.9913) = 98.6663

Question ID: 472597

The government bond spot rate curve is given below:

Maturity (years)

Spot rate

0.5

1.25%