Markov chain with the following transition probabilities: To 6% 0.4 Form 5% 7% 5% 0.6 6% 0.2 0.6 0.2 7% 0.1 0.4 0.5 Insert rates were 6% both last year and this year. The probability that they will be 5% years from now is: (a) 0.203 (b) 0.318 (c) 0.282 (d) 0.6
Markov chain with the following transition probabilities: To 6% 0.4 Form 5% 7% 5% 0.6 6% 0.2 0.6 0.2 7% 0.1 0.4 0.5 Insert rates were 6% both last year and this year. The probability that they will be 5% years from now is: (a) 0.203 (b) 0.318 (c) 0.282 (d) 0.6
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Transcribed Image Text:(15) Interest rates are either 5%, 6% or 7%. Changes in interest rate are modeled as a
Markov chain with the following transition probabilities:
To
6%
Form
7%
5%
0.6
0.2
5%
0.4
6%
0.6
0.2
7%
0.1
0.4
0.5
Insert rates were 6% both last year and this year. The probability that they will be 5% three
years from now is:
(a) 0.203
(b) 0.318
(c) 0.282
(d) 0.6
Expert Solution
Step 1
The given transition matrix is shown below
| FROM | TO | ||
| 5% | 6% | 7% | |
| 5% | 0.6 | 0.4 | 0 |
| 6% | 0.2 | 0.6 | 0.2 |
| 7% | 0.1 | 0.4 | 0.5 |
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