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Note: For the part involving Newton method, choose yo = 0.0655 and apply only one iteration. 2. (10 marks) Consider a binomial model of the
Note: For the part involving Newton method, choose yo = 0.0655 and apply only one iteration. 2. (10 marks) Consider a binomial model of the yield curve over 3 years where ya; = 5%. The probability of an up movement in 1-period forward rates for year t = 2, 3 is pt : 0.4 + 0.11%, and 1period forward rates can go up by a factor of u = 1.6 or down by a factor of d = 0.9. Calculate the zero-coupon bond yield curve and the implied 1period forward rates embedded in this yield curve
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