Question: Construct a four-period, three-step (eight terminal node) binomial interest rate tree where the initial interest rate is 10% and rates can move up or down

Construct a four-period, three-step (eight terminal node) binomial interest rate tree where the initial interest rate is 10% and rates can move up or down by 2%; model your tree after that in Figure 25.3. Compute prices and yields for 1-, 2-, 3-, and 4-year bonds. Do yields decline with maturity? Why? For the next eight problems, you may find it helpful to read online Appendix 25.A.

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