Suppose the 1-year spot rate is 1%, and that a 2-year 2% annual coupon, a...
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Suppose the 1-year spot rate is 1%, and that a 2-year 2% annual coupon, a 3-year 3% annual coupon bonds are trading at par ($100). Calibrate a 2-year binomial interest rate model, assuming that interest volatility sigma o is 10%. What is the lowest rate at t=2 according to the model? Assume annual compounding. Round your answer to 4 decimal places. For example if your answer is 3.205%, then please write down 0.0321
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