Calculate the binomial interest rate tree

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Reference no: EM131316515

Note: please assume annual compounding of interest for these problems.

The on-the-run US Treasury par curve is as follows:

Maturity Coupon/YTM Market Price

1 3.50% $100

2 3.75% $100

3 4.00% $100

Using the bootstrapping methodology, the spot rates are:

Maturity Spot Rate

1 3.5000%

2 3.7547%

3 4.0134%

Assume 10% annual interest rate volatility

1. Calculate the binomial interest rate tree using the 2-year on-the-run issue and the 3-year on-the-run issue.

Reference no: EM131316515

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