Constructing binomial interest rate tree given par curve

Dear All,

I’m struggling with question regarding bond valuation. Given information below, I’m supposed to calculate fair value of Bond B2:

Bond B2: four-year corporate bond with a par value of 1000 EUR, annual coupon of 6% paid annually. POD = 1.5% (each date), recovery rate = 30%.

Par Curve for Annual Payment Benchmark Government Bonds
Coupon Rate Price Discount Factor Spot Rate Forward Rate
−0.25% € 100 1.002506 −0.2500%
0.75% € 100 0.985093 0.75% 1.77%
1.50% € 100 0.955848 1.52% 3.06%
2.25% € 100 0.913225 2.30% 4.67%

My question is: How, using the information from above calculate the value of interest rate at t=1 given volatility of 20%?

The answer says it should be 2.1180% on the upper node and 1.4197% and the lower node, but I can’t get even similar values… Constructing the tree is basically starting point to calculate fair value. Appreciate any help.

That doesn’t make any sense. The upper and lower rates at t = 1 should bound the forward rate, which is −0.25%; the lower rate has to be negative.

Those values suggest that the forward rate _1f_0 (equal to s_0) is about 1.75%.