The putable bond price tree is as follows:
|
|
100.00 |
|
A ==> 98.27 |
|
|
98.00 |
|
100.00 |
|
|
99.35 |
|
|
100.00 |
|
|
|
As an example, the price at node A is obtained as follows:
PriceA = max{(prob × (Pup + coupon/2) + prob × (Pdown + coupon/2))/(1 + rate/2), putl price} = max{(0.5 × (100 + 2) + 0.5 × (100 + 2))/(1 + 0.0759/2),98} = 98.27. The bond values at the other nodes are obtained in the same way.
The price at node 0 = [0.5 × (98.27+2) + 0.5 × (99.35+2)]/ (1 + 0.0635/2) = $97.71 but since this is less than the put price of $98 the bond price will be $98.
