3. (Bond valuation) Assuming the short rate process of Exercise 2 and risk-neutral proba- bilities of 5,
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3. (Bond valuation) Assuming the short rate process of Exercise 2 and risk-neutral proba- bilities of 5, consider a zero-coupon bond that pays $1 at time = 2. Find the value at time 0 of this bond in two ways:
(a) Using the short rate lattice and equation (16.1).
(b) Using the tree for Ro, and equation (162)
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