CFA CFA Level 2 Question on Kaplan’s question on Binomial Trees

Question on Kaplan’s question on Binomial Trees

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      Hi @BobBarkerPlaysPlinko, here’s my method:

      I’ve ignored the $ value of the bond for now, and work on a % basis (of par) to simplify things:

      Using your definition of nodes:
      U2 = 105/1.071826 = 97.9637
      L2 = 105/105321 = 99.6952

      Then fair value of bond today, V0 = 0.5 * [(97.9637+5)/1.045749] + 0.5 * [(99.6952+5)/1.045749]
                                                          = 0.5 * [98.4593+100.1150]
                                                          = 99.2872

      So 99.2872% of a par value of $1,000 should be $993, i.e. answer C. 

      Hope this helps!

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