The correct answer to the question is B, which is 2.15%. This is determined by using the Ho-Lee model to construct a binomial interest rate tree. The formula used to calculate the interest rate in the lowest node is:

$r_0 + \left(\frac{a_1 + a_2}{2}\right) \Delta t - \frac{\sigma^2}{2} \Delta t$

where:

• $r_0$ is the current annualized short-term rate, which is 3.2%.
• $a_1$ is the annualized drift for the first month, which is 80 basis points (0.8%).
• $a_2$ is the annualized drift for the second month, which is 120 basis points (1.2%).
• $\Delta t$ is the time step, which is 1/12 of a year since it's monthly.
• $\sigma$ is the annual basis point-volatility, which is 2.1%.

Plugging in the values, we get:

$3.2\% + \left(\frac{0.8\% + 1.2\%}{2}\right) \left(\frac{1}{12}\right) - \left(\frac{2.1\%^2}{2}\right) \left(\frac{1}{12}\right)$

$= 3.2\% + 1\% \times \frac{1}{12} - 2.1\% \times \frac{1}{12}$

$= 3.2\% + 0.083\% - 0.017\%$

$= 3.2\% + 0.066\%$

$= 3.266\%$

However, it seems there is a discrepancy in the calculation provided in the file content and the correct calculation. The correct calculation should yield 3.266%, not 2.15%. It's possible that there is a typographical error in the file content or a misunderstanding in the formula application. The correct formula application should be carefully reviewed to ensure the accuracy of the answer.