Answer: 101.19

To value the floored floater, we work backwards through the binomial tree: **Year 1:** - Upper node: Rate = 5.5%, coupon = 5.5% - Lower node: Rate = 1.5%, but floor is 4%, so coupon = 4% **Year 0:** - Rate = 3.5%, coupon = 3.5% **Valuation:** - At Year 1 upper node: Value = (100 + 5.5) = 105.5 - At Year 1 lower node: Value = (100 + 4) = 104 - At Year 0: Value = [0.5 × (105.5/1.055) + 0.5 × (104/1.015)] + 3.5 = [0.5 × 100 + 0.5 × 102.46] + 3.5 = [50 + 51.23] + 3.5 = 101.23 + 3.5 = 104.73 **Present value at Year 0:** PV = 104.73 / 1.035 = 101.19 The floor increases the bond's value compared to an unfloored floater, which would be priced at par (100).

Author: LeetQuiz Editorial Team