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  3. 3. the shape of the spot rate curve (20 points) 3a

3. The Shape of the spot rate curve (20 points) 3a. As shown in the...

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3. The Shape of the spot rate curve (20 points) 3a. As shown in the table, the short-term interest rate is flat at 5% across time. Does the binomial interest rate tree model imply an upward, downward, or flat term structure of spot rates? Explain. 0.5 5% 5% 5% 5% 5% 5% 0.5 3b. The table below shows that the expected short-term interest rate is flat at 5% across time, and there is uncertainty about future short-term rates. Assume no risk premium or that investors are risk neutral. Does the binomial interest rate tree model imply an upward, downward, or flat term structure of spot rates? Explain 0 0.5 6% 5% 4% 5.5% 5% 45% 0.5 3c. How would the addition of a positive risk premium in the expected bond return affect the shape of the term structure of spot rates in 3b

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