Final answer:
To calculate the value of the underlying instrument at Node 0 using a two-step binomial model for an at-the-money interest rate call option, calculate the present value at Node 1 for both scenarios and take the weighted average.
Step-by-step explanation:
In a two-step binomial model, the value of the underlying instrument at Node 0 can be determined by calculating the present value of all the possible outcomes at Node 1, and then taking the weighted average of these values.
For an at-the-money interest rate call option, this means determining the present value of the underlying instrument if the interest rate increases and if it decreases.
Using the provided information, you can calculate the present value at Node 1 for both scenarios, and then take the weighted average to find the value at Node 0.