Question
A risk analyst is working with the Ho-Lee model to construct a binomial interest rate tree. The model uses monthly time steps, with an annualized drift of 80 basis points for the first month and 120 basis points for the second month. The current short-term interest rate is 3.2% per annum, and the annual volatility is 2.1% in basis points. What will be the interest rate at the lowest node at the end of the second month?
