1. Ho-Lee Model - 25 Points Suppose the short-term interest rate volatility is o = 1.7% and the discount factors for years 1,..., 4 as follows: 1 2 3 4 DT 0.954 0.902 0.851 0.800 (a) Compute the short-term discount factor tree with yearly time steps (h = 1) implied by the Ho-Lee model. That is, populate the following Binomial tree: G(j=0) D3.4 =? w DG=0) D2 =? Bl=0) Du 2 =? H=1) Ds4=? VV A(j=0) Du? El=1) D2 = ? Cl=1) Da =? I(=2) D34 =? Fl=2) D2a =? J(j=3) DA =? t=0 t=1 t = 2 (b) Compute the continuously compounded short-term interest rate tree implied by the Ho-Lee model