Assume annual compounding and an interest rate volatility (sigma) of 10%. We have the following information in the market:

• 1-year spot rate = 2%.
• A 2-year 4% annual coupon bond is trading at par.
• A 3-year 5.5% annual coupon bond is trading at par.

Suppose you want to calibrate a three-period binomial interest rate model. What is the value of the interest rate in the node r_2, HH?

Express your answer in percent and round it to three decimal places. e.g., if your answer is 0.023567, write down 2.357 (without the percent sign).

Answer rating: 100% (QA)

To find the interest rate in the node r2HH in a threeperiod binomial in... View the full answer