Consider the interest rate tree table below. You estimated the risk neutral probability to move up

the tree to be $p=\frac{1}{2}.$

a$)(5$ marks$)$ Compute the value of the two zero coupon bonds $($assume $$100$ face value$)$

maturing at

period $i=1$ and at $i=2.$

b$)(5$ marks$)$ Compute the continuously compounded yields $($yield to maturity$)$ for both

bonds.

c$)(8$ marks$)$ Compute the value of an asset with payoff

Asset payoff $i=1=100$max$(r_1-4\%,0)$

d$)(7$ marks$)$ Set up the replicating portfolio that uses the bond prices determined in Part $($a$),$

that can replicate the asset's payoff. Check that this portfolio in fact replicates the asset's

payoffs.