Price a 3-year, 2% annual coupon, $1000 par bond using the following calibrated model for one-year...

Price a 3-year, 2% annual coupon, $1000 par bond using the following calibrated model for one-year interest rate. All rates are expressed on a bond equivalent basis. Assume annual compounding. Round your answer to 2 decimal places. t = 0 t = 1 t = 2 r_2,HH = 0.043 r_1,H = 0.021 r_0 = 0.012 r_2,HL = 0.026 r_1,L = 0.016 r_2,LL = 0.02

Expert Solution

Par value = $1000

Coupon payment = 2%*1000

= $20

Price of Bond at Time 3 = $1000*(1+0.02)

= $1020

Price of the 3 year Bond is calculated below

Bond price = $1001.19

jeff jeffy answered 2 years ago

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