Construct an

=

1

0

n=10

-period binomial model for the short-rate,r

i

,

j

ri,j

. The lattice parameters are:r

0

,

0

=

5

%

r0,0

=5%

,u

=

1

.

1

u=1.1

,d

=

0

.

9

d=0.9

andq

=

1

q

=

1

/

2

q=1q=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 byh

i

j

=

a

b

j

i

2

hij

=abj2

i

wherea

=

0

.

0

1

a=0.01

andb

=

1

.

0

1

b=1.01

. Compute the price of a zero-coupon bond with face valueF

=

1

0

0

F=100

and recoveryR

=

2

0

%

R=20%

.