Winters AM is a fixed income management firm that invests in a wide variety of debt instruments. Lauren Winters, CFA is focusing on bonds with embedded optionality. She builds the following binomial IR tree based on 10% vol. Her goal is to value a new annual pay 4.5% bond, callable at 100.5 and maturing in 3 years with a par value of $100.
Q43. The value of the bond is closest to:
a) 102.26
b) 102.76
c) 102.82
can someone please talk me through this one as I am lost! thanks
Need to see the binomial IR tree in order to be able to answer this question.
Yeah you need to post the IR tree rates to calculate it. But as you’re valuing a callable bond, whenever the calculated price at a node exceeds the call price of 100.50, then use the call price.
Callable - Price > Call price, use call price.
Puttable - Price < Put price, use Put price.
The Binomial tree has no rates in it, just the 5 blank boxes showing the 2-period binomial tree. This is a question from a 2019 CFA Society Boston mock if that helps.
is it an error in the question, or are we missing something obvious? i can email you the full question if anyone is interested