What is the rationale behind this answer below.
Thank you so much for your time.
Which of the following is the appropriate “nodal decision” within the backward induction methodology of the interest tree framework for a callable bond?
A) Min(call price, discounted value). B) Min(par value, discounted value). C) Max(call price, discounted value).
Your answer: B was incorrect. The correct answer was A) Min(call price, discounted value).
When valuing a callable bond using the backward induction methodology, the relevant cash flow to use at each nodal period is the coupon to be received during that nodal period plus the computed value or the call price, whichever is less.