Construct a n = 10-period binomial model for the short-rate, r_{i,j}

ri,j

. The lattice parameters are: r_{0,0}= 5%

, u=1.1

u=1.1, d=0.9

d=0.9 and q=1-q=1/2. This is the same lattice that you constructed in Assignment 5.

Assume that the 1-step hazard rate in node (i,j)

(i,j) is given by hij = ab^(j-i/2)

where a = 0.01

a=0.01 and b = 1.01

b=1.01. Compute the price of a zero-coupon bond with face value F = 100

F=100 and recovery R = 20%

R=20%.