Construct an = 10

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=0.9andq=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_{ij} = a b^{j-\frac{i}{2}}

hij

=abj2

i

wherea = 0.01

a=0.01andb = 1.01

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

F=100and recoveryR = 20\%

R=20%