Verify that the price of the 12% interest rate cap in Figure 25.6 is $3.909 — value Year payment has been shown 958 must add this and will

Verify that the price of the 12% interest rate cap in Figure 25.6 is $3.909.

In Figure 25.6

SOLUTION

The value of the Year 2 cap payment has been shown to be V2 = 1.958. We must add to this the value of the Year 3 cap payment and the value of the Year 1 cap payment. In Year 2, the Year 3 cap payment will be worth three possible values: