Fixed Income - Int. Rate Tree

CFA Level II Fixed Income
#1

So I have been encountering a problem in a mock regarding this topic, basically the problem gives you the following information:

Bond with annual coupon of 4.5% with a par of 100 callable at 100.5 maturing in 3 years, int. rate volatility of 10%

The Value of the bond is ?

a)102.26 b)102.76 c)102.82

So the problem is asking you to construct the binomial int rate tree but is not giving you any more information, and Iam honestly lost here my guess is that they are failing to provide all the information but would appreciate some help confirming it…

Cheers

#2

I recognise this Q and have done it recently, is it from the CFAI TTs or mocks? You’re missing the interest rates at each node, can’t calculate the price without them.

As this is a callable bond, as soon as the price > call price at each node, the bond is called, so you use the call price. Remember that when you’re working through it.