Answer: 91.29

To value a bond using a binomial interest rate tree, we work backwards from the final period: **Year 3:** - Final coupon + principal = 100 + 5 = 105 **Year 2:** - Upper node: Value = [105/(1 + 9.7199%) + 105/(1 + 9.7199%)]/2 + 5 = 95.70 + 5 = 100.70 - Middle node: Value = [105/(1 + 7.2007%) + 105/(1 + 7.2007%)]/2 + 5 = 97.93 + 5 = 102.93 - Lower node: Value = [105/(1 + 5.3344%) + 105/(1 + 5.3344%)]/2 + 5 = 99.49 + 5 = 104.49 **Year 1:** - Upper node: Value = [100.70/(1 + 5.2273%) + 102.93/(1 + 5.2273%)]/2 + 5 = 96.62 + 5 = 101.62 - Lower node: Value = [102.93/(1 + 3.8724%) + 104.49/(1 + 3.8724%)]/2 + 5 = 100.13 + 5 = 105.13 **Year 0:** - Value = [101.62/(1 + 2.5000%) + 105.13/(1 + 2.5000%)]/2 = 99.14 + 102.57 = 201.71/2 = 100.855 After rounding, the value is closest to 100.83, which corresponds to option C.

Author: LeetQuiz Editorial Team