Backward Induction

Getting tripped up a bit on some of the call dates. For example, if the bond is callable at par in 2 years of a 3 year interest rate tree - does that mean 2 years from today ie: year 1…or at year 2.

Also, callable in 1 year of a 3 year tree…?

The whole process is easy - but I think people can easily get tripped up here during the exam…

Any thoughts?


Callable in 1 year: at year 1.

Callable in 2 years: at year 2.

Callable in 3 years: at year . . . well, you can work that one out yourself.

So if it is a 3 year bond, that is callable in 1 year, that means it is only callable at YEAR 1?

I guess that makes sense now…