## (Solved) (10 marks) (Yield curve modelling) Consider a binomial model of the yield curve over 3 years where 90.1 = 5%. The probability of an up movement in...

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2. (10 marks) (Yield curve modelling) Consider a binomial model of the yield curve over 3 years where 90.1 = 5%. The probability
of an up movement in 1-period forward rates for year t = 2, 3 is pt = 0.4 + 0.115, and 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
zeroâ€”coupon bond yield curve and the implied 1â€”period forward rates embedded in this yield curve.

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This question was answered on: Sep 05, 2019

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