Determine the future periodic spot interest rates, at one period from now, on a onestep Ho-Lee model, using current periodic spot interest rate of A1 percent, current spot rate over two periods of A2 percent, and an annual interest rate volatility of .005 (.5%).
Then consider the current spot rate over three periods of A3 percent to find the future periodic interest rates in a two-step Ho-Lee model. The period is A4 months.
Note: Interest rates are expressed as annualized rates for the term specified. Report your interest rate answers as fractional numbers like 0.11 for 11% per year.
| A1 |
A2 |
A3 |
A4 |
| 13 |
13.25 |
13.35 |
11 |
Find the following.
1. The trend (lambda1) in interest rate in the first period.
2. The trend (lambda2) in interest rate in the second period.
3. The future periodic rate on the upside at the end of one period.
4. The future periodic rate on the downside at the end of one period.
5. The future periodic rate at the up-most branch at the end of two periods.
6. The future periodic rate at the middle branch at the end of two periods.
7. The future periodic rate at the down-most branch at the end of two periods.
8. The future periodic rate at the down-most branch at the end of two periods.