EFFECTIVE DUR CALC PROB : Valuation and Analysis of Bonds with Embedded Options

In Reading 30 Valuation and Analysis of Bonds with Embedded Options, EOC 28.

  1. Based on Exhibits 1 and 2, the effective duration for the AI bond is closest to:
    A 1.98.
    B 2.15.
    C 2.73.

Can some one please explain to me how in the solution they changed the interest rates in the binomial tree for 30bps up/down?

You have to calibrate each new tree based on the new (up/down) par curve.

You won’t have to do that on the exam.