Year
|
Spot Rate (%)
|
One-Year Forward Rate (%)
|
1
|
|
|
2
|
|
|
3
|
|
|
(b) Using the spot rates, what would be the value of a 3-year 9% coupon option-free bond of this issuer?
(c) Using the binomial model (which assumes that one-year rates undergo a lognormal random walk with volatility s), show that if s is assumed to be 15%, is it correct that the lower one-year forward rate one year from now equal to 6 %.
(d) Demonstrate that if σ is assumed to be 15%, using Excel solver to solve how much is the lower one-year forward rate one year from now. Pls draw a binomial model and put the value on each of the node.
(e) Demonstrate that if σ is assumed to be 15%, using Excel solver to solve how much is the lower one-year forward rate two years from now. Pls draw a binomial model and put the value on each of the node.
(f) Determine the value of a 3-year, 9% coupon bond that is callable at par (100) assuming that the issue will be called if the price exceeds par.
15. a. What is meant by the option-adjusted spread?
b. What is the spread relative to?
17. What is the effect of greater expected interest-rate volatility on the option-adjusted spread of a security?