May 2000 Course 6 12a

[Wile E. Coyote]

I've missed something here, after deriving the V(0) of the puttable bond (using OAS) to be 100.43 the conclusion is that this is <100 so the bond will be put immediately. Does that make sense?

A side point, do we ignore any options in the cash flows until OAS is added to the spot rates? The top lattice in the solution doesn't ammend the V(H) value to 100 even though in the high interest rate situation it would be called. Just an affirmation of this would be helpful.

[Exam Slave]

First, check what JAM says.
The V-0 equation has two 100's in it, which means the value at V-H has been changed to 100. It's as if that last sentence should have been placed after the V-H calculation.