Let us construct a binomial interest rate tree for a 5.5% option free bond taking Table 3 as the binomial interest rate tree. Table 1 shows the various values in the discounting process. The present value of the bond is calculated using backward induction and it is $100.714.
Table 1: Valuing an Option Free Bond
Assumed Volatility = 10%
Coupon rate = 5.5%