MidtermTwo_Summer2009

MidtermTwo_Summer2009 - ACTSC 445/845 Solutions Midterm 2...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ACTSC 445/845 Solutions Midterm 2 1. [10 points] Consider the following binomial tree, where q ( t,n ) = 0 . 6 for all nodes ( t,n ), and one period is equal to one year. 1 2 5% 3.8% 5.5% 4.5% 5.2% 6.4% Based on this tree, determine the price a callable bond with face value 100, coupon rate of 6% per year, and maturity at time 2. The bond can be called at time 1 and at time 2 (but not at time 0). When called at time 1, the issuer must pay a redemption value of $102 rather than $100. At time 2, the redemption value is $100. Solution: We have V (1 , 1) = min(102 , 106 / 1 . 055) = 100 . 47 V (1 , 0) = min(102 , 106 / 1 . 038) = 102 V (0 , 0) = 1 1 . 05 (0 . 6(100 . 47 + 6) + 0 . 4(102 + 6)) = 101 . 98 . It was also possible to compute the price of the option-free bond and then subtract the value of the call option. 2. [10 points] Consider the following binomial tree, where q ( t,n ) = 0 . 5 for all nodes ( t,n ), and one period is equal to one year....
View Full Document

This note was uploaded on 12/12/2010 for the course ACTSC 445 taught by Professor Christianelemieux during the Fall '09 term at Waterloo.

Page1 / 3

MidtermTwo_Summer2009 - ACTSC 445/845 Solutions Midterm 2...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online