CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

What is the value of a 2-year, 6% coupon, callable bond (in one year at 100) given the following interest rate tree?

Correct Answer: 101.923

Current value of the bond at node 0 = [(99.755 + 6) / (1.038796) + (100.000 + 6) / (1.038796)] / 2 = 101.923

User Contributed Comments 14

User Comment
katybo finally Im understanding binomial trees!
xyzanand Life is a binomial tree...
octavianus How do you calculate the call values in general? In this case, how do you determine $99.755 (Up) and $100 (down) for year 1 call values?

Please help!!!!
mchu Value at the Node = Min {Value from backward induction, Call price}

Call price is par.
tabulator octavianus, take some time reading notes and not jumping straigh to problems
rhardin Yes, the notes were very clear and helpful. Read them.
moghizz read them octavianus! read them!
charomano 99.755 = 0.5*(100+6)/(1+0.06205) + 0.5*(100+6) / (1+0.06205)
ukrainia Octavianus check the notes brah!
ybavly Jeez, Octavianus, it's right there staring at you. Read the notes!!
bbadger If the interest rate is less than the coupon rate, write in the call value. You need a greater than coupon interest rate to discount to less than par value.
bbadger And don't read the notes Octa, in fact I hope at least 65% of you don't study at all. Thanks.
thebkr777 ^LOL @bbadger
Level 2 thinking right here
davidt876 ...turns out octa really doesn't have a clue wa gwaan
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