PT - JOURNAL ARTICLE AU - Grzegorz Krzyżanowski AU - Ernesto Mordecki AU - Andrés Sosa TI - Zero Black–Derman–Toy Interest Rate Model AID - 10.3905/jfi.2021.1.122 DP - 2021 Dec 31 TA - The Journal of Fixed Income PG - 93--111 VI - 31 IP - 3 4099 - https://pm-research.com/content/31/3/93.short 4100 - https://pm-research.com/content/31/3/93.full AB - We propose a modification of the classical Black–Derman–Toy (BDT) interest rate tree model, which includes the possibility of a jump with a small probability at each step to a practically zero interest rate. The corresponding BDT algorithms are consequently modified to calibrate the tree containing zero interest rate scenarios. This modification is motivated by the recent 2007–2008 crisis in the United States, and it quantifies the risk of future crises in bond prices and derivatives. The proposed model can be useful to price derivatives. A comparison of option prices and implied volatilities on US Treasury bonds computed with both the proposed and the classical tree model is provided in six different scenarios along the different periods comprising the years 2002–2017.