Binomial Tree Equity

CFA Level II
#1

Hi Guys,

I was solving the problem of the curriculum (Reading 35, question 13) and I don’t get the answer…

There is a Bond, with maturity 2Y and a coupon of 2,5% and they ask for the price in the upper node in T1.

According to what I understand. this is calculated as 2,5 (coupon in T1) + 102,5/1,028853 (coupon + principal in T2) which is 102,1255. The correct answer according to the curriculum is 99,6255, which is just 102,5/1,028853… so they don’t add the coupon of T1…

That is correct??

T0: 1.500%

T1 upper: 2.8853% T1 lower: 1.7500%

Thanks!!

#2

The coupon paid on that date is not part of the value of the _ bond _.

It is, however, part of the value at that node, which is discounted back to time zero.