Previously, the emphasis was on obtaining information from clients. In this chapter, the emphasis was on preparing witnesses for trial. To properly prepare witnesses for trial, the paralegal needs to….
Calculate the price of a 5-year zero-coupon bond at each node of the tree.
Call on a bond.
This problem is about the valuation of a call on a bond and goes beyond the scope of equity derivatives. Consider a world where, at any given point in time t, the interest rate curve is flat at rate rt which may vary. Currently, for all maturities. Below is a tree of various scenarios made by analysts for the evolution of rt over the next two years.
(a) Calculate the price of a 5-year zero-coupon bond at each node of the tree. Keep in mind that the maturity of the zero-coupon shortens at each step.
(b) Using a two-step binomial model, calculate the value of a 2-year European call struck at 90 on this bond.