Determine the future periodic spot interest rates

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Determine the future periodic spot interest rates, at one period from now, on a one-step Ho-Lee model, using current periodic spot interest rate of 7.38 percent, current spot rate over two periods of 7.62 percent, and an annual interest rate volatility of .005 (.5%). Then consider the current spot rate over three periods of 7.72 percent to find the future periodic interest rates in a two-step Ho-Lee model. The period is 5.38 months. Find the following.

The trend (lambda1) in interest rate in the first period.

The trend (lambda2) in interest rate in the second period.

The future periodic rate on the upside at the end of one period.

The future periodic rate on the downside at the end of one period.

The future periodic rate at the up-most branch at the end of two periods.

The future periodic rate at the middle branch at the end of two periods.

The future periodic rate at the down-most branch at the end of two periods.

Reference no: EM131130075

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