According to 5.F the value of the embedded call is 1.354 makes sense since we are saying the callable bond should sell for 1.354 than an identical no callable bond… for the sake of it, i decided to value the call option seperatly using the same tree, i was assuming that i would also get 1.354 but i did not…which is strange because i always read that owning a callable bond is the equivilant to buying a bond, and selling a call option on it… here is how i valued the call, i hope its just a matter of me making a mistake in valuation… else what is the reason for not getting 1.354 for the call value??? VALUE THE CALL: at node nhh, the call is worth 0 because the price is bellow 100 at node nhl the call is worth 0.591 since the price is 0.591 above 100 at node nll the call is worth 1.93 since the price is 1.93 above 100 -------------------------- at node NH we can not exersise the call because 99.55 is less than 100 but, the call is still worth the PV of its value at the child nodes so ((0.591+0)/2)/1.08414=0.272 at node NL, the child nodes have a PV of ((1.93+0.591)/2)/1.06944=1.17 since we can get 1.455 by exercising rather than waiting, then at this node the call will be worth 1.455 and not 1.17 at node n, the call is worth the pv of its child nodes… ((1.455+0.272)/2)/1.075 =$0.8 which is not the same at 1.354 …
Never mind guys, roki mistake, but I leave it up here so you can learn from my mistakes lol… to value the call seperatly, you need to use the tree on page 337, the one where the price of the bond is not reflected for the option… i guess what i valued before is a call option on a callable bond, lol so anyway, using the right tree you get the right answer… now thats 2 study hours wasted