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  3. 1. you observe the following set of spot rates: ti

1. You observe the following set of spot rates: Time Period Oyly Oy2y Rate...

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1. You observe the following set of spot rates: Time Period Oyly Oy2y Rate 2.25% 2.75% 3.10% You also estimate that future interest rate volatility is 10%, which leads to the following binomial interest rate tree: 4.647% 3.5930% 2.25% 3.8046 2.9417% 3.115% 1. What is the value of a bond that matures in exactly 2 years, has par value of $100, an annual coupon of 4.4%, and is not callable? 2. What is the value of a bond identical that of Problem #1 but is callable in 1 year at a price of 101? 3. Relative to your answer in #2, what would happen to the price of the bond if it was callable at par? Explain in 1-2 sentences. 4. Relative to your answer in #2, what would happen if the future interest rate volatility was 5% rather than 10%? Explain in 1-2 sentences. 5. What would happen to the duration of the bond in Ex. 2 if interest rates decrease. Explain in 1-2 sentences

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