Prof. Kinnear is practicing pathwise valuation. He is lookin…
Prof. Kinnear is practicing pathwise valuation. He is looking at a three-year, 4% annual coupon, option-free bond. The interest rate tree has four potential paths: Prof. Kinnear calculates the pathwise value for each of the four paths. He then sums these four values and divides by four to find the average. Which of the following statements is most accurate regarding his calculations?
Read DetailsUsing the benchmark par curve, you bootstrapped the followin…
Using the benchmark par curve, you bootstrapped the following spot rates: S1 = 2.00% S2 = 3.0151% S3 = 4.0545% Identify any arbitrage opportunities available for the following bonds: Bond Issuer Maturity Coupon Market Price Alpha Corp 3 Years 0% (Zero) €87.25 Beta Inc. 2 Years 5% (Annual) €105.50 Ignoring trading costs, which of the following actions generates the highest expected profit?
Read DetailsThe assumed annual volatility for a binomial tree is increas…
The assumed annual volatility for a binomial tree is increased from 10% to 15% due to heightened investor uncertainty about the path of interest rates. When an analyst updates the binomial tree to reflect the higher volatility of 15% (assuming the yield curve remains unchanged), what is the most likely effect on the interest rate nodes in Year 1 (r1,H and r1,L)?
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