Calculate the zero-coupon bond yield curve

Reference no: EM131962917

Question: Consider a binomial model of the yield curve over 3 years where y_0, 1 = 5%. The probability of an up movement in 1-period forward rates for year t = 2, 3 is p_t = 0.4 + 0.1 t, 1-period forward rates can go up by a factor of u = 1.6 or down by a factor of d = 0.9. Calculate the zero-coupon bond yield curve and the implied 1-period forward rates embedded in this yield curve.

Reference no: EM131962917

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