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Basic Question 8 of 9

For a t-period binomial interest rate tree, there are ______ final payoffs.

A. t2
B. 2t
C. t + 1
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User Contributed Comments 2

User Comment
cfa2017 Given current level of short-term rate r, next-period short rate can take on only two possible values: an upper value ru and a lower value rl, with equal probability of 0.5.

In period 2, the short-term interest rate can take on four possible values: r uu, r ul, r lu, r ll.
davidt87 cfa2017 no dude, did you even read the answer? In period 2 there are 3 final payoffs, because the upper and lower values of the period 1 payout options combine to the same middle value:

5
- 4 -
3 3
- 2 -
1
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I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz

Tamara Schultz

Learning Outcome Statements

describe a binomial interest rate tree framework;

CFA® 2025 Level II Curriculum, Volume 4, Module 27.