Question #34
Reading: Reading 26 The Arbitrage-Free Valuation Framework
PDF File: Reading 26 The Arbitrage-Free Valuation Framework.pdf
Page: 16
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 3 is closest to:
Answer Choices:
A. $99.88
B. $100.02
C. $101.85
Explanation
Answer: Path 3 value =
(Module 26.2, LOS 26.g)
+
+
= 101.85
3.0
(1.02)
3.0
(1.02)(1.02078)
103.0
(1.02)(1.02078)(1.030216)