Help calculating callable bonds

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BlkdOut
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Joined: 29 Oct 2015 14:28

Help calculating callable bonds

Post by BlkdOut »

I have attached a spreadsheet that shows the method I believe should be used while calculating callable bonds vs how I was told to do it in class. I am hoping someone with experience can either help me understand why my intuition is incorrect, or give me confidence that the intuition is correct. Thank you in advance. The rate tree is provided, the two different methods are described in the worksheet. If you have any questions or need clarification please let me know. I feel that method two violates the law of one price at T=1 in the down position, but my instructor does not seem to think so. I believe the price difference shown is significant, but have no real world experience in the field.

I posted this topic earlier in the week and realized that my spreadsheet may have been a bit confusing so I cleaned it up and added descriptions of the methods used.

Thanks again,
BlkdOut
Attachments
Binomial Calculations (Edited).xls
(31.5 KiB) Downloaded 28 times
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