Suppose we have a model of the short rate where drt = 0.25% dWt N(0, dt) . 0.25% and 1% are the annualized drift and standard deviation . Suppose the initial short rate is 6%, and we try to model this short rate with steps of one month.

1. Sketch a 2-month tree of short rates. 2. List any two distributional properties of the short rate implied by such a model, stating whether this property is desirable or undesirable.