Suppose that the short rate is 4% and its real-world process is:
dr = 0.1(0.05 - r)dt + 0.01dz
While the risk-neutral process is:
dr = 0.1(0.11 - r)dt + 0.01dz
First Question:
What is the market price of interest rate risk?
Second Question: What is the expected return and volatility for a 5-year
zero coupon bond in the risk-neutral world?
Third Question: What is the expected return and volatility for a 5-year zerocoupon bond in the real world?