Dear All,

I’m struggling with question regarding bond valuation. Given information below, I’m supposed to calculate fair value of Bond B2:

Bond B2: four-year corporate bond with a par value of 1000 EUR, annual coupon of 6% paid annually. POD = 1.5% (each date), recovery rate = 30%.

Par Curve for Annual Payment Benchmark Government Bonds | ||||
---|---|---|---|---|

Coupon Rate | Price | Discount Factor | Spot Rate | Forward Rate |

−0.25% | € 100 | 1.002506 | −0.2500% | |

0.75% | € 100 | 0.985093 | 0.75% | 1.77% |

1.50% | € 100 | 0.955848 | 1.52% | 3.06% |

2.25% | € 100 | 0.913225 | 2.30% | 4.67% |

My question is: How, using the information from above calculate the value of interest rate at t=1 given volatility of 20%?

The answer says it should be 2.1180% on the upper node and 1.4197% and the lower node, but I can’t get even similar values… Constructing the tree is basically starting point to calculate fair value. Appreciate any help.