1. (80 pts.) Assume an economy where One period is one year The one year short term interest rate from time n to time n +1 is rn. The rate evolves via a stochastic process: | To = 0.02 Pn+1 = Xrn X = 2k) = = for k {-1,0,1}. (1) Consider now a zero-coupon bond that matures in 3-years with common face and redemption value F = 100. Compute Bo, the value of this zero-coupon bond. (20 pts.)