The following information has been given regarding the spot rates and the forward rates. Construct a binomial tree interest rate based upon the given data assuming the volatility is 30%. Following spot rates are given along with partial interest rate tree as follows:
Year
Spot Rates
1
2%
2
3%
3
4%
One-year forward rates with volatility 30% are given as follows:
t=0
t=1
t=2
2%
5%
B
A
C
D
Also, after constructing the binomial tree, find the value for $100 par value, 3-year, 3% annual pay bond.