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The YTM of 1-year and 2-year treasury bonds are 2.5% and 3.5%, respectively. The 1-year bond is zero coupon and the 2-year bond trades at
The YTM of 1-year and 2-year treasury bonds are 2.5% and 3.5%, respectively. The 1-year bond is zero coupon and the 2-year bond trades at par. If the annual volatility is 7%, calculate the r1Lr1L (i.e., the smaller branch of the binomial tree at T=1). Report the result in the percentage format (e.g., if the answer is 0.0321, report it as 3.21). Assume "annual" coupon payments.
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