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Binomial Interest Rate Tree

The document discusses building a 3-year binomial interest rate tree to find the one-year forward rates for year 2 using a 3-year 4.5% coupon bond. It provides the assumptions of an initial spot rate of 3.5% and volatility of 10%, and constructs the tree with the given coupon rate and market price.

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864 views

Binomial Interest Rate Tree

The document discusses building a 3-year binomial interest rate tree to find the one-year forward rates for year 2 using a 3-year 4.5% coupon bond. It provides the assumptions of an initial spot rate of 3.5% and volatility of 10%, and constructs the tree with the given coupon rate and market price.

Uploaded by

api-3744863
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Binomial Interest-Rate

Question: Finding out the one-year's forward rates for year 1 using the two-ye

Assumption
r1,L 4.07%
Given
Sigma 10%

Market value today 100


PV today 100
V= 99.07
(Vh+C)/(1+r) 99.59 NH C= 4
(Vl+C)/(1+r) 100.41 r1,H= 4.976%
MV= 100
N C= 0
r0= 3.50%
V= 99.93
NL C= 4
r1,L= 4.074%
l Interest-Rate Tree for 2 years

using the two-year 4% on-the-run

V=
NHHH C=
r3,HHH= 0.000%
V= 100
NHH C= 4
r2,HL= 0.000%
V=
NHHL C=
r3,HHL= 0.000%
V= 100
NHL C= 4
r2,HL= 0.000%
V=
NHLL C=
r3,HLL= 0.000%
V= 100
NLL C= 4
r2,LL=
V=
NLLL C=
r3,LLL=
Binomial Interest-Rate T

Question: Finding out the one-year's forward rates for year 2 using the three-yea

Assumption
r1,L 4.07%
Given
Sigma 10%

Face Value 100


Coupon rate 4.50%
Observed
market price 100 Given V= 98.07
NH C= 4.5
r1,H= 4.976%
MV= 99.57
C= 0
PV today 100 r0= 3.50%
Given V= 99.93
(Vh+C)/(1+r) 99.11 NL C= 4.5
(Vl+C)/(1+r) 100.89 r1,L= 4.074%

N
l Interest-Rate Tree for 3 years

using the three-year 4.5% on-the-run issue

V=
NHHH C= 4.5
r3,HHH= 0.000%
V= 100
NHH C= 4.5
r2,HL= 0.000%

V=
NHHL C= 4.5
r3,HHL= 0.000%
V= 100
NHL C= 4.5
r2,HL= 0.000%
V=
NHLL C= 4.5
r3,HLL= 0.000%
V= 100
NLL C= 4.5
r2,LL=
V=
NLLL C= 4.5
r3,LLL=

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