Computational Methods in Economics and FinanceHW 1010.2. A coupon bond is a bond that makes payments while the bond is aliveas well as at its terminal date. Continuous coupons are like dividend°ows. Most coupons, however, are paid discretely. Price a 10 yearbond using the CIR interest rate model that pays 0:05 (5%) times itsface value at the start of every year, starting one year after it is issued(assume a face value of 1). Use the parameters · = 0:1, ® = 0:05 and¾ = 0:08.A callable bond is like an option in that it can be exercised early butthe seller has the right to determine whether it is exercised. Price theabove coupon bond with the extra feature that the seller can call thebond once a year right after paying the coupon. Essentially this meansthat the exercise value is 1:05. If the bond is worth more than thisalive, it is optimal to call the bond.Write a Matlab program that prices the coupon bond both with andwithout the callable feature. Note that finsolve could be used to solvethis problem but it is ine±cient (you should make sure you understandwhy). You should, therefore, write your own code to solve this problem,preferably in the form of a function that can be reused for other bondpricing problems. Your code should be robust so that features such asthe bond’s horizon and how often it is callable can be easily altered.”
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