Hi, Need help on this qbank #89417. Annual Coupon $6.25 Interest Payment Semi-annual Part 1) Wall is having a few problems computing the bond prices using the interest rate tree. He would like to compute the value of the non-callable bond at node A given the relevant part of the tree. Using the referenced portions of the tree, what is the value of the non-callable bond at node A? Relevant part of interest rate tree: 8.95% 7.91% 7.23% Corresponding part of non-callable bond tree: $92.38 A $96.83 The value of the bond at node A is closest to: A) $90.56. B) $94.01. C) $97.02. Your answer: A was incorrect. The correct answer was B) $94.01. This value of the non-callable bond at node A is computed as follows: Bond Value = {0.5 × [Bond Valueup + (Coupon / 2)]} + {0.5 × [Bond Valuedown + (Coupon / 2)]} / (1 + Interest Rate / 2) Bond Value at node A = {0.5 × [$92.38 + ($6.25 / 2)]} + {0.5 × [$96.83 + ($6.25 / 2)]} / [1 + (7.91% / 2)] = $94.01 (Study Session 14, LOS 55.d) Why isn’it 90.565 with this calculation: [((92.38+3.125)/1.0791)+((96.83+3.125)/1.0791)] / 2 ??? Why do they divide 7.91% by 2 ?? Thanks for your insights.
any taker on this one ? basically, my question is why do they divide interest rate by 2 ?
semi annual… to be assumed by default, unless stated. so coupon and interest rates are divided by 2. the rates in the tree are annual rates unless stated as well.
well done, thanks cpk.