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Assume annual coupon payment and annual compounding. Recall that par rate is defined as the coupon rate at which the price of a bond equals
Assume annual coupon payment and annual compounding. Recall that par rate is defined as the coupon rate at which the price of a bond equals its face value (or par value). Suppose the par rate for a 2-year $100-par bond is 2%, and that the current 1-year spot rate is 1%. Calibrate a 1-period Binomial interest rate model, assuming a 10% volatility . What is the higher 1-year rate at t=1? 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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