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Assume annual compounding and an interest rate volatility (sigma) of 10%. We have the following information in the market: 1-year spot rate = 5%. A

Assume annual compounding and an interest rate volatility (sigma) of 10%. We have the following information in the market:

1-year spot rate = 5%.

A 2-year 6% annual coupon bond is trading at par.

A 3-year 7.5% annual coupon bond is trading at par.

Suppose you want to calibrate a three-period binomial interest rate model. What is the value of interest rate in the node r_2,HH?

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