What is the expected present value and the yield to maturity

Reference no: EM132213189

Problem: Consider a bond as in question 1 (50% higher and 50% lower; no default) but where the issuer can call the bond. Assume the issuer calls the bond at the start of any year when it is revealed that the interest rate is above the 6% initial rate. When the bond is called, the issuer makes the coupon payment for the preceding year and makes the payment of the face amount. a.Draw the binomial tree incorporating the call behavior of the issuer. Clearly indicate the payments made at each point in time. b.What is the expected present value and the yield to maturity of this bond?

Question 1: Consider the expected value of a three-year continuously compounded coupon bond with interest rate uncertainty. Interest rate the first year is 6% and it increases randomly (50% higher, 50% lower) each year. The bond has a face value of $100 and a coupon rate of 5% of face. What is the expected present value and the yield to maturity?

Reference no: EM132213189

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