Valuation an option-free bond with the tree, Financial Management

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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

2379_valuing opton free bond.png

Assumed Volatility = 10%

Coupon rate = 5.5%

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