Recall that: $dr = \sigma dw$
From the information, $r_0 = 7.31\%$, $\sigma = 1.67\%$, $dw = 0.21$

Therefore:
$dr = 1.67\% \times 0.21$
$= 0.35\% = 35$ basis points

Things to Remember

• Short-term rate is the interest rate on a financial asset with a maturity of less than one year.
• Volatility in the context of interest rates refers to the degree of variation of interest rates over time.
• The no drift model assumes that the short-term rate follows a random walk with no drift or trend.
• When using the normally distributed rates model, the change in the short-term rate ($dr$) can be calculated as the product of the volatility ($\sigma$) and the random variable ($dw$).
• Mean zero implies that the expected value of the random variable is zero.
• Standard deviation is a measure of the dispersion or variability of a set of values.