Question: 3.(10 points) Exhibit Binomial interest rate tree fit to the yield curve (Volatility = 20%) Current Year 1 Year 2 Year 3 Year 4 1.2500%
3.(10 points) Exhibit Binomial interest rate tree fit to the yield curve (Volatility = 20%) Current Year 1 Year 2 Year 3 Year 4 1.2500% Node 1-1 Node 2-1 Node 3-1 Node 4-1 Node 1-2 Node 2-2 Node 3-2 Node 4-2 Node 2-3 Node 3-3 Node 4-3 Node 3-4 Node 4-4 Node 4-5 Which of the following statement(s) about the missing interest rates is (are) correct? D. Node 4-4 should be equal to Node 3-4 multiplied by e02 E. Node 4-2 should be equal to Node 4 multiplied by e02 F. Node 4-2 should be equal to Node 4-4 multiplied by e4 G. Node 4-1 should be equal to Node 4-5 multiplied by e H. Node 4-1 should be equal to Node 4-5 multiplied by el. Please circle the right answer(s) and explain the two attractive properties of using the lognormal random walk or interest rates in generating the binomial interest rate
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