If anyone is familiar with or working on Level II - Fixed Income, Binomial Model Interest Rate Trees starting on page 305, I would love some help. I’m making sense of the first step moving backwards with par value ($100) and the coupon ($4.70) in terms of adding the two and dividing by the previous year spot rate of 1.070053. Calculation equals $97.846 like they show you. I’m getting stuck on the next steps though because following the same logic of taking that price ($97.846) adding the same coupon ($4.70) and dividing by the previous year spot rate (1.054289) is coming too $97.26 instead of their $97.823. I’ve tried making adjustments with the spot rates thinking that you need to derive the actual spot rate from the previous year and current year, but I’m still not getting it right. Again, I would greatly appreciate the insight. Thank you, Dave
GOT IT!!! Of course, I overlooked the significance of the equation they gave you on page 305… it’s been a long day.
next one is an average of the two nodes …