Question #14
Reading: Reading 26 The Arbitrage-Free Valuation Framework
PDF File: Reading 26 The Arbitrage-Free Valuation Framework.pdf
Page: 7
Status: Correct
Correct Answer: A
Question
A 3-year, 3% annual pay, $100 par bond is valued using pathwise valuation. The interest rate paths are provided below: Path Year 1 Year 2 Year 3 1 2% 2.8050% 4.0787% 2 2% 2.8050% 3.0216% 3 2% 2.0780% 3.0216% 4 2% 2.0780% 2.2384% The value of the bond in path 2 is closest to:
Answer Choices:
A. $100.88
B. $101.15
C. $102.72
Explanation
+
+
= 102.58
3.0
(1.02)
3.0
(1.02)(1.02078)
103.0
(1.02)(1.02078)(1.022384)
Path 2 value =