Binomial Tree and Bond Valuation

CFA Level II
#1

Hey there,

Just a quick question. What’s the formula to compute the value of a bond using a Binomial tree?

I thought it was ((Upper Bond Price+ Coupon) + (Lower Bond Price + Coupon))*.5 / 1+r

Yet in the EOC questions, the formula seems to be ((Upper Bond Price/1+r + Lower Bond Price/1+r)*.5 + Coupon)

So which one is the good formula?

Thanks!

#2

Depends on if you’re valuing a bond that is callable or option free.

The first one you wrote is for callable/putable bond and the second is for option free.