The callable bond price tree is as follows:
|
100.00 |
|
A → 98.67 |
|
| 98.29 |
|
100.00 |
|
99.00 |
|
100.00 |
As an example, the price at node A is obtained as follows:
PriceA = min[(prob × (Pup + (coupon / 2)) + prob × (Pdown + (coupon/2)) / (1 + (rate / 2)), call price] = min[(0.5 × (100 + 2.5) + 0.5 × (100 + 2.5)) / (1 + (0.0776 / 2)), 99} = 98.67. The bond values at the other nodes are obtained in the same way.
